A Case for Strategic Foreclosure
Posted on 06. Feb, 2012 by Scott Schang in Foreclosure Prevention
Strategic foreclosure is a term used for choosing to let your home go to foreclosure because you owe so much more than it’s worth that the light of day cannot be seen.
This is an interesting conversation for me because I mostly see this from the standpoint of the home owner, and therefore struggle with the ethics of purposely defaulting like many of the folks I have talked with about this subject.
I don’t buy into the whole “banks are evil – they screwed me so I’m doing it back” argument. Yes, the banks absolutely “allowed” things to happen that should not have, but come on, let’s be really honest – It takes two to tango.
If a homeowner used their home as an ATM machine, stripping every red cent of equity out every time they received a phone call from a sleazy mortgage guy telling them they can cash out AND lower their payments – What did you expect would happen? It would just go on forever?
Then, there is the family that bought their dream home, either took money out for home improvements or college tuition, or simply bought at the absolute peak of the market.
In either scenario, home owners are left without a chair when the music stops (do they even play musical chairs anymore?).
I don’t feel much empathy for someone that tried to take advantage of the situation to make over extend themselves beyond what is fiscally responsible or reasonable, but I do understand that this is the exception and not the rule.
Most folks just got caught in the wrong place at the wrong time and got stuck in a bad investment.
Another indicator of strategic foreclosure is usually that the home owner can afford the payments, they just choose to not throw good money after bad.
This is the part that I can completely understand. Typically speaking, your home is your greatest asset. It’s the American Dream, it’s where your kids are raised and countless memories are made. In times like these however, it can feel like a cement block tied to your leg and dropped into the ocean.
As a business decision, it just makes sense to cut your losses sometimes. I totally get that. If you find yourself in this position, it’s important that you first consult your CPA or tax consultant to get advice about the possible tax consequences of defaulting on a mortgage as well as understand which is the best option for “giving the home back” to the bank so that you can be in a position to buy again sooner.
As responsible, underwater homeowners continue to make payments on time, I can see the frustration that builds as every single Government program is directed toward helping the homeowners with overwhelming financial hardship. It seems like if you can afford the payment on your severely upside down home that you’re out of sight, out of mind.
The only possible way to prevent strategic foreclosure in the future is for the banks to look at some sort of principle reduction program. Although there have been whispers of principle reduction programs, I am yet to see any serious discussion take place by anyone that has the ability to actually do something about it.
What do you think? Are you one of the families that it makes more sense to let the home go than to continue to pay good money after bad? What would your solution be if you were in charge?
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