Strategic Defaults Increasing As Homeowners Choose Not To Pay Their Mortgage

Last Updated May 18, 2010 8:13 AM EDT

Here's how I see the world of mortgage finance: You have homeowners who have been in temporary loan modifications who are now being denied a permanent modification.

And, they're not happy. Not by a long shot.

According to new Treasury data released yesterday, about 300,000 Americans have received permanent loan modifications. But a higher number of homeowners are being denied permanent modifications and are being dropped from the program.

Who are these folks? They might be like any of the 500+ folks who have shared their stories on my Loan Modification Hell: Join The Club post. Or, they might be like Beth, a former firefighter who had a seizure, lost her job, went on disability, and is only seven years away from paying off her home in full.

Their lenders tell them they don't qualify for help. So, what do they do? As I see it, they have three choices:
  • Foreclosure. The lender takes the property and kicks them out (or hands them a couple of grand to leave things clean.
  • Short sale. The sellers have to find a buyer and then negotiate with the lender(s) until everyone agrees. The problem with short sales is how long it takes to get a response from the lender.
  • Strategic default. The lender says you can afford to pay your loan. And, maybe you can. But you decide to walk away nonetheless.
Given the prolonged state of economic suffering, it should surprise no one that strategic defaults are rising as homeowners are choosing not to pay their mortgages.

New data from the University of Chicago and Northwestern University found that strategic defaults jumped in the first quarter of 2010. In fact, last quarter, "more homeowners voluntarily defaulted on their mortgages and chose to walk away from their homes than the total number of mortgages permanently modified to date under the Administration's year-old Home Affordable Modification Program (HAMP)," according to Steve Cook, who writes Real Estate Economy Watch with former National Association of Realtors Chief Economist David Lereah.
Thirty-one percent of foreclosures in March, 2010 were perceived to be "strategic" compared with 22 percent in March, 2009.
Perhaps it's just because more people are talking about strategic default. I'll bet three years ago, no one really knew what this phrase really meant. Indeed, the first time I wrote about strategic default was last November.

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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com.
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    Ilyce R. Glink is an award-winning, nationally syndicated columnist, best-selling book author, and radio talk show host who also hosts "Expert Real Estate Tips," a Internet video show. She owns ThinkGlink.com as well as Think Glink Media, a privately held company that provides consulting, content and video services to companies and non-profit organizations.

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