What's The Strategy Behind A Strategic Default?????

By
Real Estate Agent with PalmerHouse Properties & Associates, LLC 316636

I read a blog post today by Teresa Boardman on the Inman Daily News (PM Edition) titled, " Would You Walk Away". In a nutshell, Ms. Boardman spoke about a young man who purchased a home with his fiancee who eventually walked out on him....and her mortgage obligations. This young man struggled to make the mortgage payments and contacted his mortgage company repeatedly attempting to get a loan modification, but to no avail. He was told that since his payments were current, he didn't qualify for a modification. He found a roommate who refused to uphold his end of the bargain and pay the rent on time and eventually left. The young man struggled with other creditors and eventually his credit rating dropped because of late and delinquent payments. Eventually, he fell two months behind on his mortgage payments and again contacted the bank for help, but was informed that help was only available for those who are current on their mortgage payments.

Ms. Boardman goes on to speak about the young man's option of just simply walking away from the home and the terrible ramifications to his credit. Now don't misunderstand me, situations like this happen in every nook and cranny of our country and it has devastating consequences to a homeowner and family. However, this blog made me think of our mission as short sale specialists. This is the reason why we devote our careers to assisting homeowners in despair. It's clear that Ms. Boardman is emotionally attached to this young man's plight. I mean, who wouldn't be? It's also clear that there is so much that Ms. Boardman can do to help alleviate this young man's situation that wouldn't involve the "F" word. A strategic default to a homeowner in distress may seem like a viable solution, but the after effects are lingering and real. I really don't understand why it's called a strategic default in the first place...there's no real strategy after the default.

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Rainmaker
412,551
Rodney Mason
Guaranteed Rate - Atlanta, GA
AL, GA, SC, & TN

I have actually always heard of "strategic default" in a different context.  An example would involve someone who has not lost their job, suffered an illness, had mortgage payment increase, gotten a divorce, etc.  Their financial picture may still be the same as it was a few years ago when the home was purchased.  Home value is the key factor in the . 

They may have purchased their home for $400,000 in 2006.  Today, the estimated value might be $275,000.  They view the $125,000 difference as something that will take too long to recover from.  To them, walking away is the cheaper alternative than staying in the home and continuing to make the monthly payments.    

Jun 03, 2010 01:44 PM #1
Rainmaker
82,027
Vanessa Calhoun
PalmerHouse Properties & Associates, LLC - Atlanta, GA
Your Greater Atlanta Marketing Guru!!

I can certainly understand the concept. However, what about the after effects? The damage caused by a foreclosure can potentially create a situation that would be worse than actually staying in the home and sticking it out or doing a short sale.

Jun 03, 2010 01:50 PM #2
Rainmaker
412,551
Rodney Mason
Guaranteed Rate - Atlanta, GA
AL, GA, SC, & TN

An actual foreclosure is the worst situation for all parties.  For a conventional loan, the homeowner will have to wait longer with a foreclosure than with a short sale before they are eligible for a new purchase.  The lender now has the ownership and upkeep of the house to contend with.  There is now the potential for vandalism (from both the previous owner and outside parties), preservation companies must now be utilized to keep up the property, marketing time, etc. 

With a short sale, the owner typically stays in the home until the saleis completed.  Chances for damages to the property are minimal this way.  The waiting time for a new purchase is reduced with this option. 

A Strategic Default is more or less a deliberate manipulation of the system.  Owners who do an SD typically have the means and resources to continue to pay, they just choose not to.

 

Jun 04, 2010 04:11 AM #3
Rainmaker
3,053,144
Tony and Suzanne Marriott, Associate Brokers
Haven Express @ Keller Williams Arizona Realty - Scottsdale, AZ
Serving Scottsdale, Phoenix and Maricopa County AZ

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 05, 2010 08:57 AM #4
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Rainmaker
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Vanessa Calhoun

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