'Strategic default' or 'strategic foreclosure' - no longer a social stigma

The terms "strategic default" and "strategic foreclosure" are somewhat synonymous. Homeowners in these tough economic times are faced with the daunting dilemma of whether or not to deliberately default on their mortgage as a way to secure a loan modification, short-sale, principal reduction, or return the home through deed-in-lieu of foreclosure.

Considered as a viable strategy for managing troubled debt in an era of high unemployment, government bail-outs, and the crash of the real estate market, millions of Americans are considering "strategic default" or "strategic foreclosure." With almost 28 percent of all mortgages nationwide "underwater," a growing number of homeowners are contemplating this strategy.

Should you walk away from your home even if you can afford to make the monthly payments? Millions of Americans are asking themselves that same question. Notwithstanding a substantial and continued drop in value, most homeowners feel they have a legal, moral, and ethical obligation to make their monthly mortgage payments.

Among the consequences for homeowners that decide a "strategic default" or "strategic foreclosure" is the proper course of action are judicial foreclosure, loss of home, a deficiency balance, and lower credit score. If you can resolve yourself to litigation, a deficiency judgment, and a lower FICO score for several years, walking away may be a smart decision. Right now, a small but growing percentage of homeowners are contemplating this technique.

"Many borrowers are being advised to stop paying their mortgages if they are seeking a loan modification or permission to short sale," says Carlos Reyes, a foreclosure defense attorney with the Reyes Law Group in Fort Lauderdale. "Making the decision to simply walk away is bad for the homeowner. Borrowers should consider their rights and contemplate the long ranging consequences of such an action."

By the end of 2011, approximately 48 percent of the 50 million mortgage loans nationwide are predicted to be underwater or valued less than the money owed on them. While "strategic default" or "strategic foreclosure" may make perfect economic sense, many homeowners do not choose this course of action out of shame, guilt and fear. Underwater homeowners continue to make their mortgage payments to avoid the consequence of foreclosure and a perceived negative social stigma within the community. This is especially true when a borrower has the financial ability to pay.

"More than 11 million American homeowners are underwater and estimates predict that number could more than double in the next 18 months," says Roy Oppenheim, principal of Oppenheim Law and one of Florida's leading experts on strategic defaults. "Consumers are fed up with the unwillingness of banks to modify loans and feel the need to act because of this economic crisis just like the Americans who fought in Shay's Rebellion in 1787."

Prior to simply walking away, one must consider the adverse implications of "strategic default" or "strategic foreclosure." First, and foremost, is the loss of your home. In what is being touted as the "Buy and Bail" theory, have you purchased the home across the street at half the amount of your current mortgage? If not, do you plan on renting?

Are you aware that a "strategic default" or "strategic foreclosure" will have the same impact on your credit score as a loan modification, judicial foreclosure, short-sale, or deed-in-lieu of foreclosure? Are you aware that you can be sued in most states for any deficiency balance owed?

Research in a recent study by Experian found that homeowners with high credit scores when they applied for their mortgage were 50 percent more likely to "strategically default" or abruptly and intentionally abandon their loan in comparison with lower-scoring borrowers. Using a massive sample of 24 million individual credit files, it was determined that approximately 588,000 borrowers simply walked away from their homes in 2008. This is up 128 percent from 2007.

As the social stigma of foreclosure and simply walking away from your home through "strategic default" or "strategic foreclosure" has begun to dissolve amid the mortgage meltdown, the next 18 months will prove to be a banner time in the housing market. Homeowners who had a good credit history before they walk away through "strategic default" or "strategic foreclosure" can usually rebuild their good name and reputation within three to five years.