Strategic Default: What and Why?

Reposted from the original article at Lender411.com

The housing market is seeing a startling trend: Homeowners who are abandoning their mortgage voluntarily, in a new move called a strategic default.

According to Experian, the typical strategic defaulter is high income, high in liquid assets, financially savvy, with good to excellent credit scores. They may also have applied for other credit lately, and are usually dealing with an underwater mortgage, meaning that they owe more than the property is worth. They are most frequently found in regions where the rate of mortgage balances rising above home values is increasing.

Why would someone in effect commit financial suicide? It appears that rather than attempt the paperwork and red tape of a modification or refinance, these homeowners are instead lining up a new home and loan. Once they gain approval, they simply discard their old home and its mortgage. For someone with a credit score of 790 or higher, the 140 point foreclosure penalty may not seem as intimidating.

However, some of these people engaging in strategic defaulting may not fully understand the repercussions of their actions. 38 states in the USA allow lenders to pursue foreclosed homeowner for the remainder of the money that was agreed upon in the mortgage but was not collected in the foreclosure sale.

Credit scoring companies are devising ways to track characteristic behaviors of strategic defaulting so that they can alert lenders. New research also shows that despite their attempts to escape their mortgage obligations, the majority of these homeowners were still having financial difficulties 18 months after foreclosure.

The actions of strategic defaulters are far too extreme for most homeowners, even those that may be struggling with payments. Refinancing is always a better option than home abandonment, and there are many resources to help homeowners with the process. Lenders have responded to the needs of their borrowers, offering education and assistance through their websites and in person. JP Morgan Chase and Bank of America have both expanded their loan modification programs in an effort to help keep families in their homes, and will continue to offer more solutions to avoid mortgage default and foreclosure.