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When would a STRATEGIC DEFAULT make "good" sense?

By
Education & Training with Speed Equity®

When would a Strategic Default make "good" sense?

 

When I was a young grad student, one of my professors said; " . . . there is always a simple answer to a complex question . . . and it's usually wrong."

I feel the issue of Strategic Defaults certainly falls into this category.

I have read several posts on this topic and a lot of people seem to have a personal opinion about the "morality" of this choice.

As professionals, we owe it to our ourselves AND our respective industries to provide logical, well thought out responses to such complex issues as Strategic Defaults without making people feel any worse than they already do, thanks to their predicament. It is our job to provide as much information as we possibly can so that people may make INFORMED DECISIONS rather than emotional ones . . . And most certainly, let's not be too hasty to cast judgment unless we have walked in someone else's shoes.

First, let's be clear about what is a "Strategic Default" . . . and I quote Debe Maxwells' great blog:

 

"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 address the question of . . .
"Should you engage in a strategic default?"


My PERSONAL OPINION

First, my personal opinion about Strategic Defaults is that I completely concur that one should NOT renege on any commitment (contractual or personal) if you have agreed to a particular course of action. Simply choosing NOT to make your mortgage payments, even though you can, and allowing your home to go into foreclosure hurts us all.

However, I have come across one scenario whereby a Strategic Default seems to make "logical" sense, and that is:

1. A homeowner is too far underwater to break even on a property sale in the next several years

2. They have to relocate due to employment reasons (and many are faced with this choice right now)

 

QUESTION: What would you do in this instance?

 

 

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Comments (5)

Ernie Steele
Lebanon, PA

We had clients who 'walked away'  after a buyer had a septic inspection that found it to be terribly outdated and inadequate...Buyer negotiated with our seller etc. and we came to an agreement...Problem?...There was not enough land with the property to install a new septic system according to code and no additional land to purchase and the buyer couldn't get a mortgage as it was even though it had worked flawlessly for the sellers who had it serviced every 2 years...Buyer cancelled contract as would be expected...Sellers had already purchased a new property and had the means to make the purchase without the proceeds from their sale...They moved, called the mortgage company, mailed the keys...I think I would have done the same thing.

Jul 05, 2010 07:14 AM
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

Ernie, thank you for sharing.

It just goes to show that not everyone is out to scam the system and there are some legitimate reasons as to why some people choose this option. 

Great anecdote - thanks again for sharing.

Jul 05, 2010 07:22 AM
Debe Maxwell, CRS
Savvy + Company (704) 491-3310 - Charlotte, NC
The RIGHT CHARLOTTE REALTOR!

Hi Hari!  Transferring is considered a hardship for a short sale and I would encourage a client to take that route and suffer a far less impactful credit hit than with a walk-away! 

There is also another great example--someone who is nearing retirement and has absolutely no way of recouping their investment well AFTER retirement and would like to downsize to their retirement home. 

Have a great week...and thanks for the mention/link!

Jul 05, 2010 12:14 PM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

Strategic Default is an acronym for cowardice.  If one is an ostrich - then stick your head in the sand.  If you are a responsible individual - do a Short Sale - unless your legal and tax advisors tell you to do otherwise.

Jul 08, 2010 04:40 AM
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

Tony,

Thank you for your "personal" opinion.

I should have added that as an option.

However, as I said in my post, "Our role as industry "professionals" is to EDUCATE & INFORM".

You could have made your point without the heavy emotional overtone.

How about creating a blog about the pros and cons of Short Sales - and let me know because I'd certainly reblog it for you.

Cheers.

 

 

Jul 08, 2010 05:12 AM