Debtor’s Dilemma: Pay the Mortgage or Walk Away

Well, in the post immediately preceding this one, we see that there are people whose financial situation is such that they have to [The Burning Questions]worry about eating between getting their monthly food stamp allotment.  That’s not the full story of the financial crisis as we’ve another group of people who, while not needing to concern themselves with food stamps, nevertheless seek to place themselves on the government dole by shifting their losses back to the banks and ultimately to the taxpayers with a strategic default on their mortgage as reported by the Wall Street Journal

What’s so strategic about doing this?  Well,  the answer to that question lies in understanding the distinction between a strategic foreclosure and a regular one.  Most foreclosures come about due to the homeowners inability to pay due to job loss and etc. which leaves them with insufficient resources to pay their monthly mortgage.   In a strategic foreclosure, the individual can actually afford to pay their mortgage, but chooses not to because they’re underwater on the house (i.e. mortgage  balance owed is well in excess of the value of their home).  Strategic foreclosures aren’t limited to individuals either.  There are major corporations that are starting to do this as well in portions of their commercial real estate portfolios.

Now, we can all empathize with people who lost their jobs or who’ve encountered some other financial calamity resulting in foreclosure.  But I’m not so sure my heart gets tugged at by someone who wants to weasel out of their mortgage just because their home value dropped.  That’s just adding more fuel to the fire that’s already out of control.

This trend will probably accelerate in the next few months as home prices get weighed down by the payment option ARM resets that will begin over the next few months.  I know I sound like a broken record, but I’ll say it again; home prices are caught in a deflationary spiral in many areas of the country.  If you must buy now, you’ll want to negotiate at least 20% to 30% off the asking price for downside protection otherwise you’ll find yourself swimming underwater with the "fishes" and mulling the strategic default option.

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