Strategic default can be practical

Posted by & filed under Misc.

Saw another story about “strategic defaults” — on CBS. Interesting notion that people still seem to put too much emotion in dealing with an asset that no longer performs.
Would you feel bad about selling company stock if it dropped significantly and there was no end in sight? Probably not. Unless you have deeply personal connection to it, or you know something that others don’t (in which case SEC probably wants to have a word with you).
So, why not the house? Especially if the state laws allow you to return the property in leu of your mortgage debt. You probably earn enough to keep paying, but because of that, you won’t get any help from the government or the bank. It’s only poor people who deserve help when their major purchase turned out to be overpriced and now costs 50 percent less than initial price.

If you think that your neighbors will think badly of you, think of it this way: they won’t be your neighbors any more.

Think you have obligation before bank? But banks and developers do default on their debts when value drops so significantly, that it doesn’t make much sense to pay the same monthly payment any more.
Plus, when you signed that mortgage paper, bank agreed to use your house as a collateral. Surely they have enough specialists that told them that drop was coming (at least some banks did hedge their bets, and got insurance against housing market going down). So, they get their compensation — they do get your house, which they agreed was worth the amount of the mortgage balance (plus whatever you have already paid off).

Of course housing commission would be all upset if/when more and more people decide to just give their keys to banks. But they got themselves into this conundrum by offering help to only certain part of the population. Nobody can claim that it’s not fair to return house to bank if one can afford it but can’t sell the house for the amount roughly equal to mortgage balance. Those who got deeper upside down on their houses got bailed out. Being bad about paying, lying on application, winking at bank got them a reward. So, it’s only fair if other people bail themselves on something unworthy of their monthly payment.

Yes, the credit will generally be badly damaged for 7-10 years. If you have family, it’s probably less of a problem — your spouse would still have good/beter credit, should you decide to buy another home sooner than that. You will still save enough money by renting, that you’d be able to have a sizeable downpayment. And trust me, if the housing boom starts again, bank will gladly close eyes on your previous credit sin. Because that will have been “back then” and profit from selling a house will be right before bank’s greedy hungry eyes.

So, analyze your situation. Check your options. Do a spreadsheet. If you’re paying too much, walk away.

Situation in Texas seems to be much better, so all of the above probably doesn’t apply to you (unless you bought something extra fancy for million or more bucks, but then, you probably know when or if you should default on your super-sized mortgage).

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