That isn't how the song went in 1966 when The Left Banke recorded it, but it's the advice that a University of Arizona professor is giving in a recently published paper. The professor, Brent T. White, an associate professor of law at the University of Arizona, makes the case that our social mores, more so that any logic, forces people to struggle too long against the odds of their mortgage being severely under water.
In a move that White euphemistically labels a "strategic default", he argues that the playing field is too far tilted towards the lenders and that too few borrowers understand that defaulting is not the end of the world that they have been told. Certainly there is damage to ones credit from a default; but, White argues that borrowers have not been told the whole story about how to rebuild their credit and how fast that can occur.
White argues that borrowers are too focused upon the shame or stigma of a default to think clearly about it as the strategic thing to do, when they are severely under water. The fact is that it actually causes more damage to the owner to "hang tough" trying to find a way to salvage an impossible situation. Too often these people burn through their savings and maybe their retirement savings trying to keep up with rising payments from ARMs that have reset or to keep up a lifestyle, even after things at work have changed and income has dropped dramatically. White would argue that the pride involved in not admitting defeat and waling away may cause more damage than just giving up the house.
I must admit that I have become very disillusioned about short sales as a solution to the problem. In my estimation, short sales do no one but the realtors involved any good. The seller ends up with a blemish on his/her credit record that is almost indistinguishable from a foreclosure and the bank ends up taking less for the house. Only the realtors involved get anything positive out of the deal - their commissions. That is why I have shut down my short sale Web site. I just couldn't in good conscience continue to recommend this path to sellers who are under water on their homes.
So maybe a "strategic default" is the best way out of these bad situations. A deed-in-lieu offer to your lender at least puts you in the position of having suggested pro-actively the way out for both of you. It saves the bank having to go through the Sheriff's sale and saves the homeowner having to see his/her name show up in the local papers in the foreclosure ads. It's still no better than a foreclosure from a credit standpoint, but it can make the owner feel more empowered and more in charge of the situation. White also makes a strong case that there are actually financial benefits to be gained from walking away vs. staying in a bad mortgage situation.
The article by White is one of those scholarly tomes, with footnotes that about equal the length of the article itself. Here's the bottom line - if you bought a house in the 2004-2007 timeframe, you likely bought at the peak of the market and your house in now worth 30-40% less than what you paid for it. It makes no sense to try to sell it and it may make no sense to try to hold on to it. The banks were given every opportunity and much encouragement by the government to work with owners to modify loans on upside down houses and they have refused. You don't owe them any more loyalty that they have shown you. Just walk away and let them have the houses that they still insist are worth 30-40% more than the market price. You won't get off Scott free - your credit score will take a big hit and it will take you time to rebuild it, plus you'll end up paying taxes to bail the clowns at the bank out, too; however, you won't have to wreck your savings and your retirement plan trying to save a lost cause. But, hey, I'm just a humble Realtor and not a scholar or financial expert. You should consult both. Read Professor White's paper and then talk to your advisors, both finacial and legal, before you do anythng.
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