Do You Stay and Pay or Do You Walk Away?
Today, the topic of conversation has been that of strategic default. Imagine that, a holiday spent talking about America and her celebrations as well as her problems. Believe it or not, the conversation came up as a result of a post by Lenn Harley that I recently read. The post, FANNIE MAE SET TO COLLECT ON DEFICIENCY JUDGMENTS CAUSED BY STRATEGIC DEFAULTS, got the wheels turning about this topic and I decided to ask the question--"Would you strategically default if you were upside down on your mortgage and could afford to make the payments?"
First, let's define strategic default:
A strategic default is the decision by a borrower to stop making payments (default) on a debt despite having the financial ability to make the payments due.
This is associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the property value is such that the debt owed is (considerably) greater than the value of the property – the property negative equity or “upside-down” – and the value is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are also called “walkaways.”
Now, let's further stipulate the following with regards to my question:
- You ARE financially capable of making your mortgage payments
- Your home IS showing negative equity (basically, you're upside-down)
The question again now, "Would you strategically default if you were upside-down on your mortgage and could afford to make the payments?"
100% of those I asked said that they were committed via contracts with the bank and would not partake in this practice.
I do, however, personally know several people who have done this--they made a good real estate decision at the time that they purchased but, with the market tanking, those living in the suburbs (and even in the Uptown/Midtown areas of Charlotte) have found that our values have simply plummeted. These homeowners have made, what they call, 'business' or 'financial' decisions to default on their mortgages--none of them were in a distressed situation, they just chose to leave the keys on the counter, vacate the property and never make another mortgage payment. Many of whom have already made other real estate purchases--getting 'great deals' on property and purchasing before their previous payment history becomes a negative on their credit report.
I, for one, am in the same boat that they are/were--I own two properties that have each lost well over $100K in the last 3 years. My credit score is near perfect and VERY valuable to me so, perhaps foolishly in some minds, I am staying put and not walking away from either one of these mortgages. Keep in mind that both are in great areas (one in the city, one in the 'burbs') but regardless of that fact, the values are plumeting in both areas. On the street that I live, there are now two rentals--absolutely UNHEARD OF in the past several years! Those homeowners made the decision to hold onto the property and rent for several years until they've either paid a hefty amount on their principle or the market turns around considerably. There are alternatives to walking away.
It is frustrating for me to see folks who are in no distress strategically default. I signed a CONTRACT that I would re-pay both of these mortgages and plan to continue doing so. I will not walk away from my word. As I see it, that's what strategic default really is.
On the other hand, I'm extremely angry with the government's handling of the economy; I too am a 'victim,' if you will but, I will not go back on my word when I am financially capable of continuing to pay these mortgages--I am NOT in distress and neither are those who strategically default (hence the name "strategic default").
We're not talking about those who are defaulting because they have had major financial strains that have put them in short sale or foreclosure situations--we're talking about people who don't keep their word yet, who COULD keep their word--and I feel, SHOULD. Their claim of default being a 'business' decision is what I have a problem with--who wants to do business with someone who doesn't keep their word or goes back on it--leaving the bank holding the proverbial empty bag?
Their rationalization is that the banks can afford it--or they're the cause of their losses! All banks were not the villans here--many took TARP money because they HAD to, not because they WANTED to--another Paulson-brilliant-idea but, that's a whole other can of worms.
In my opinion, your word is your bond.
Let me add that I've been in situations representing clients who have done everything in their power to get the banks to give them a helping hand--who truly need the help--with no response or a flat-out denial with regards to refinancing or restructuring their mortgages. We then, put their homes on the market as a short sale, and despite having a Contract submitted, (and are 4-5 days from Closing), the bank forecloses--out of the blue! We've had the bank provide commitment to hold off on the foreclosure for 4 weeks beyond the Closing date, yet still, the bank foreclosed. Yes, another can of worms that will be opened one day in another post!
I guess I'm writing this post to both inspire discussion and give me a reason--a good, solid, respectable reason--that you would consider default.
For me, the keyword here is respectable but, convince me, nonetheless.
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