The topic of strategic defaults has become a widely talked about idea. A strategic default is when you walk away from your real estate by giving your home back to the bank.
I wanted to cover this because it has become widely talked about. I'm neither condoning or condemning it. I will never advise or encourage someone to do this nor will I be judgmental of someone who has.
If you are considering this you should seek competent legal advice and financial advice, I am giving neither. You should never make the decision based solely on advice from a real estate agent who advises you to do this so they can attempt to short sale your property.
Why would anyone make the decision to strategically default on their mortgage obligation?
Well, what if it makes sound financial sense?
For example:
John purchased a home at the height of the market in 2006. He paid $500,000 for his home. (No he did not buy more than he could afford and was not stretching beyond his means, so lay that popular misconception aside.) Today his home is worth around $250,000 because of a few recent Jacksonville distressed property sales in that area. Once foreclosures start to hit neighborhoods the values begin to rapidly deteriorate since the practice is to under price Jacksonville foreclosures.
John still has a good job, he is not in eminent danger of being late on his home. In short, he can afford to keep his home. John also realizes that it might take years for his home to recover in value. What happens if he loses his job in five years and needs to sell his house? He doubts that he will be able to. What about 7 years down the road? Ten? What if he needs to downsize to retire and can not sell his home. Will he be able to maintain his payments at that point? Will his value have recovered so he can sell? John realizes that if he walks away now, he could begin to recover financially as opposed to waiting for years for the ball to drop. John starts to seriously consider turning in the keys as part of a financial strategy to move forward rather than stay in a hole that can possibly cause future financial ruin.
To make matters more interesting, due to the drop in commercial real estate values...developers, businesses and even BANKS have begun to make strategic default decisions on commercial property! This practice is not usually judged harshly by the public, so why the double standard? Why are so many willing to accept this practice in business as being a sound financial decision? Why aren't homeowners entitled to make similar financial decisions? Business decisions for the future of their family's welfare?
I'll say it again. Banks made the decision to loan the money...the homeowners did not loan the money to themselves. Banks knew the web that had been built through mortgage securitization...the homeowner could not even begin to grasp the tangled web that they were flying into. The banks knew the decisions they were making were less than prudent...yet it allowed them to make a profit. So they did it for as long as they could get away with it.
The little homeowners (think fly in a web)? They just wanted a home for their family. They didn't know, or care, about the complexities of the house of cards that the banks had carefully built. They had no idea that once it was stacked to a certain height that house of cards would begin to crumble.
If this is something you are considering please seek competent legal and financial advice and understand the future ramifications of this decision. And remember, no one can predict the future. No one can know that today's decisions will appear to be sound a few years down the road.
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