Is A Strategic Mortgage Default Really A Good Idea?

Is Strategic Mortgage Default a Good Idea?

Due to the uncertainty of economic conditions and the increasing number of property foreclosures, many homeowners are asking the question, “Is strategic mortgage default a good idea?”

Before contemplating the answer to this query, it is important to first define what strategic mortgage default is all about.  Basically, the concept of strategic mortgage default refers to the decision of the borrower to stop making payments on a loan, despite the seeming financial capability to make good with the payments.

The question of “Is strategic mortgage default a good idea?” caters mostly to commercial and residential mortgages that are negatively affected by a substantial drop in the housing market.  In this context, the face value of the real property becomes substantially lower than the debt owed giving it a negative equity or what is commonly referred to as being underwater.

The issue of strategic mortgage default also reflects on the possibility of the financial situation remaining in effect for an unforeseeable future like in the case of a bursting real estate bubble.  Borrowers that make strategic mortgage default decisions are commonly known as walkaways.

Benefits of Strategic Mortgage Default

Homeowners who are curious to know if strategic mortgage default is a good idea are usually looking for the perceived benefits that can arise from making this decision.  Basically, some economists believe that sustaining such a real estate strategy can lead to the collapse of the property and finance bubble.

Moreover, these economists also agree that a strategic mortgage default is one of the ways to help free homeowners from mortgage debt burdens.  One of the benefits that can arise from being concerned if a strategic mortgage default is a good idea is that debtors become free to use their income towards other expenses.

In the context, it is important to realize that businesses have been using strategic mortgage defaults for the longest time.  Usually, when a business loses its ability to pay off its debts it simply closes its doors or informs the bank that its loan must be reduced otherwise they will default on it.

If it can provide such benefits from businesses, then homeowners have the right frame of mind to ask if strategic mortgage default is a good idea.  Potential benefits of a strategic mortgage defaults for homeowners can include:

• The concept of strategic mortgage default is a relatively new one for homeowners.  By using this real estate strategy, homeowners that traditionally enjoyed a comparatively stable market can avoid becoming victims of the dive-in home prices which average at about 20% to 30% depending on the location of your real property.  This also saves homeowners from having properties that have substantially less value than their financial obligation.

• The strategic mortgage default is a good alternative to the short sale option.  Lending facilities estimate that approximately 20% of existing home loans succumb to strategic mortgage defaults especially when the value of the real estate property sinks below 75% of its fair market value.  The preference of homeowners to apply strategic mortgage default is one of the reasons why some lending facilities promote the short sale option instead.

• A homeowner asking if strategic mortgage default is a good idea should realize that one of the perceived benefits that can be derived from this real estate strategy is that they can continue to live in the real estate property without making payments until the foreclosure proceedings have been completed.  Normally in the real estate industry a foreclosure proceeding can last as long as a year of sometimes longer.

In considering if strategic mortgage default is a good idea, homeowners must also be aware that the federal government has already implemented a new program that attempts to limit the number of borrowers using strategic mortgage default.  It is believed that the program provides as much benefit for the lender as it does to the borrower.

However, it must be realized that the last thing lending facilities want is to foreclose real estate property because it will be hard to recoup their expenses.  In stark contrast, a short sale option will allow the lending facility to recover a substantial amount of the debt without having to spend as much on the process.

• When considering if strategic default is a good idea, the perceived benefits must be compared with the other perks that can be derived from alternative strategies.  Though it is true that in the context of strategic mortgage default, the borrower can live mortgage free for a particular period and gain substantial control over reducing your overall debt, it can extensively impact their credit score in a negative manner.

Compare this to the benefits of a short sale option which will allow the borrower to payoff essentially the entire financial obligation without having to impact their existing credit score.  Although it is true that they would have to give up their home, the borrower however will be able to take out a new loan easier because of the credit score remaining intact.  With regard to the question, is strategic mortgage default a good idea? It should also be asked in the context of is it a better solution than short sale?

When contemplating if strategic mortgage default is a good idea, homeowners must not lose sight of the fact that despite the perceived benefits, there are also some damaging consequences.  It must also take into consideration that there is a reason why lending facilities choose to promote short sale options instead.  The current financial condition of the homeowner would eventually dictate an accurate answer if strategic mortgage default truly is a good idea after all.

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