Strategic Mortgage Default
- Two schools of thought have emerged regarding the morality of strategic default.
- Is it immoral to walk away from a mortgage you can afford?
- Or, is it just smart economically?
The value of property is hopelessly underwater, and will take 10+ years to reach the loan value. Should I allow a default?
I was not able to continue making payments on my mortgage and home equity payments due to an income reduction in 2009. I attempted a loan mod, but was told I make too much. I then tried a short sale, but the 2nd mortgage holder would not agree to the amount that the 1st mortgage holder was willing to pay them. I have since gotten a new job. I still cannot make the payments on the home equity, but can afford to pay the 1st mortgage. Also, the 2nd mortgage holder has charged off the loan. I owe $315K on my 1st and $205K on my 2nd, and my home is worth $220K. Is there any benefit to getting my 1st mortgage current? Experts predict it will take at least 10 years to get the home values back to what I owe. Should I just walk away or get current on my 1st mortgage and work out a settlement plan with the 2nd mortgage holder?
What you are really asking about is called strategic mortgage default, where a homeowner voluntarily walks away a mortgage because the balance of the mortgage(s) is greater than the fair market value of the home.
Two schools of thought have emerged regarding the ethics or morality of strategic mortgage default. Former Treasury Secretary Henry M. Paulson Jr. is quoted in The New York Times saying that "any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligation."
On the other hand, Brent T. White, a University of Arizona law professor and author of Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis argues that the deleterious effects of foreclosure are less than people expect, and that morals and ethics should not enter into an economic decision. After all, banks use economics and not emotion when making loans, and banks are not averse to breaking leases for office space when it is to their benefit. Therefore, I will leave the ethics question up to you to decide.
If a modified mortgage will cause you financial distress, then there is no moral or ethical issue to ponder -- you must walk away from the deal and the property. If the deal is bad, consider a short sale or deed in lieu or foreclosure.
You did not mention foreclosure, but would be remiss if I did not point out the Bills.com resources Judicial Foreclosure, Foreclosure Advice, and Stop Foreclosure as sources to learn more about foreclosure.
You mentioned economic reasons to allow a strategic default, which are compelling. However, you do not mention intangible reasons to stay in the property. For example, if you have minor children who attend a great neighborhood school, then that is a benefit to staying. Also, if the property is your dream house, in a great location with neighbors who a picture-perfect, then your chances of recreating that neighborhood synchronicity are low. Living in a great house that you love disfavors strategic default.
On the other hand, if the neighborhood is in general decline, you have no attachment to the area, and your children (if any) would be happier elsewhere, then the intangibles are in favor of a strategic default.
Before you settle on a strategic default, be sure to educate yourself on the Home Affordable Foreclosure Alternatives Program (HAFA), which is a federal program that defines standards for short sales.
I hope this information helps you Find. Learn & Save.
I recommend that you speak with your current lender regarding available foreclosure alternatives, including loan refinance, loan modification and short sales. Check out your budget and cash flow. Explain to the lender your capabilities and your desire to pay off your loan with reasonable payments, based on your financial situation. If you do decide to do a short sale, then you will need to negotiate a settlement for the deficiency balance. If correctly done this will not hurt your credit score.
Also, speak with a local real estate agent to receive realistic rental and sale prices. Perhaps by renting at a real market price you will be able to afford the mortgage payments.
Your facts make an excellent argument in favor of a strategic default. No one likes strategic default, but the choice of raiding a parent's retirement fund is an even worse idea.
My advice? Talk to a lawyer in your state who has real property experience to learn more about your state's anti-deficiency laws, if any, and your options for handling the deficiency balance.