What is a Strategic Mortgage Default?

Strategic Mortgage Defaults

Just Stop Paying Your Mortgage Because You Want To?

That’s right, some people are deciding to not pay their mortgages simply because it is strategically one of a number of ideas that make sense in today’s economy.

Perhaps like me you read this article on Mortgage Defaults sometime in the last couple of days. As the article points out, homeowners that are simply walking away from their mortgages because they owe more money on their home than their loan balance have increased dramatically this past year.

What do you think? Good idea? Bad people? Bad idea?

I can tell you that the personal side of walking away from a mortgage strategically is what we in the legal and real estate world call foreclosure. I’ll be the first to say that some of my clients who have made this decision have done so with painstaking analysis of both their financial condition and their options, concluding that many of the so called refinancing or modification options are really thin air, not options at all. For these homeowners, walking away from their mortgage is simply what they must do to survive.

When homeowners walk away from their mortgage, what happens to your home value?

No warm or fuzzy here.  When your neighbor folds up his tent, walks away from his mortgage, and ultimately is foreclosed on, the value of your home goes down.  It’s the laws and regulations with regard to appraisals that mostly do you in.

Your home, Home A, is worth $500,000.  Home B, your neighbors, WAS worth $500,000, but now they have defaulted on their mortgage, and the bank bought the home at foreclosure for $400,000.  The bank wants their $400,000 back, and they are going to try to sell it for the first $400,000 that comes their way.  That means that when someone comes in to buy Home C, the same kind of home as yours and Home B, the appraiser MUST say the value of the home is as the last comparable sale, i.e. $400,000.

Don’t shout it’s not fair, because while it’s not, a home’s value is simply what the market will pay at any given time.  If homes just like yours are available at $400,000, then all of those homes have to sell before the next round of home buyers will consider paying more for your home.

Bad news, but better to be informed than not.

Contact Us if you want to talk about placing a value on your home today.

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