Alternatives to Strategic Default / Strategic Foreclosure
The U.S. government has tried several initiatives to reduce the incidence of foreclosures (strategic and involuntary). These are incentives to banks to negotiate a lower principal or monthly payment, so the borrower can remain in his house.
In the view of many observers, banks and other lenders have been very slow to renegotiate mortgages, even after the subprime mortgage crisis. For example, a 2009 study by the Federal Reserve showed that only 3% of “seriously delinquent borrowers” received a loan modification. Banks have shown their own analyses which showed securitization (with many unknown mortgage holders) and redefaults to be primary reasons for this.
Many believe that banks refuse to renegotiate mortgages because they expect to profit more from a foreclosure. Those borrowers doing a strategic foreclosure would not argue with this, but believe that it is in their own best interests to get out from under the mortgage and use the savings to continue their lives. They believe that a proactive strategic forclosure is a better alternative than an unavoidable involuntary forclosure a few months later.
In April, 2010, President Obama proposed new regulations to assist homeowners who are underwater. The success of these changes is yet to be determined.
Researchers say that loan modification programs may actually increase strategic defaults, because their endless red tape and repeated requests for documentation cause anger among potential beneficiaries.
Additionally, lenders often offer loan modifications only to borrowers who have already defaulted. This leads the well-heeled to intentionally quit making mortgage payments, and these strategic defaults cause further losses in the mortgage industry.
Time magazine, Nov 22, 2010, page 66, carried a report that the Loan Value Group had created the Responsible Homeowner Reward program that it hoped will reduce the number of foreclosures. Under the program, banks promise to pay a lump sum of cash to homeowners who make their mortgage payments on time. LVG determined that up to 30% of mortgage defaults are strategic defaults, done by the owners of 13 million homes that are under water (borrowers owe more than their homes are worth).