Who Should Do a Strategic Default / Strategic Foreclosure?
The deeper underwater your mortgage is, the more reasonable it is to do a strategic default / strategic foreclosure to avoid bankruptcy. If you bought your house for $300,000, and it’s worth $250,000 now, you should probably hold on to it as the housing market improves and you can sell it for as much as, or more than, you paid.
But, if you bought your house for $300,000 and it is worth only $150,000 (a drop in value of 50%), then a strategic forclosure becomes much more sensible.
Factors to consider include:
- Will you be unbearably ashamed if your house goes into forclosure?
- Will your lower FICO credit score afterward prevent you from getting a new job?
- Do you have serious moral concerns about walking away from a debt?
A study by Morgan Stanley found a higher percentage of defaults were strategic defaults among people with higher FICO scores and larger loan balances.
However, the stigma of doing a default and foreclosure remains strong, so few people consider strategic defaults until their savings are almost depleted.
According to a recent report by the University of Chicago Booth School of Business and Northwestern University’s Kellogg School of Management, “strategic defaults” (walk-aways) now account for nearly one in three foreclosures. That’s up from 22% one year earlier.
Homeowners doing a strategic default walk away when they are “underwater,” owing far more than the value of their home, because they realize that they are unlikely to ever recoup the losses. The further homeowners fall underwater, the more likely they are to walk.
Recent data shows about one in four U.S. homeowners being now or recently underwater, according to CoreLogic, a company that provides financial data. Nearly 5 million of those borrowers have mortgage debt which exceeds the value of their property by at least 25%. The total negative equity in these deeply underwater borrowers is an astounding $655 billion. So much for the notion that property only goes up in value!
Doing a Strategic Default is certainly not for everyone, but it does make sense for many.