Strategic Default with a home mortgage is when the owner makes a business decision to not continue to pay on spiraling mortgage and instead decides to cut loose from the mortgage with a short sale or a foreclosure. The owner makes a conscious decision to "cut their losses" and stop paying the mortgage and apply for a short sale or worse, let's the house foreclose.
In Arizona, where many homeowners owe more than double of what their home is now worth, strategic default may be necessary for future economic survival. What is the point on continuing to pay on a 30 year loan for a product that may only appreciate in value to the amount owed (break even point) in 20+ years? Many people in Arizona purchased homes two years ago for $300,000 only to find that today that same house is worth $150,000 and experts are predicting that it may take up to 20+ years to recover and get the value back to $300,000.
Donald Bisenius, a VP of Freddie Mac's Single Family Credit Business, stated today in the Wall Street Journal that he felt that strategic default for a single family homeowner is bad for the neighborhood because it drives down all of our values. His definition of strategic default is when a homeowner has the financial means to make the monthly payments, but chooses to purposely default on his loan. Obviously the man has never been to AZ lately. He goes on to say that the homeowner's strategic default is bad social policy.
Homeowners are not sipping margaritas by the resort pool's while deciding that it is better to cut their losses on their biggest investment....their family home. They are choosing between buying another bag of Top Ramen at Fry's or making the the mortgage payment. Most families I see choosing to short sale are really struggling. Many have lost their jobs or have a significant cut in pay. Many are relocating to other states so that they can maintain their income....but then are faced with making the mortgage payment on the AZ house and trying to pay rent in the new city. Coupled with medical issues and divorce, etc., these people are going under and no one is throwing them a lifeline.
Freddie Mac's officials are trying to fog the mirror by placing all the blame for the neighborhood economic downfall on the little people....the homeowners. What about the strategic default of Morgan Stanley 2 months ago when they defaulted on hundreds of millions of dollars in loans in just one swoop? How about the banks that are going bankrupt? Does their single action cause a lot more devastation to our economy than one tiny homeowner defaulting because they are choosing the survival of their family?
How about if Freddie Mac looks back in the foggy mirror and suggests that more lenders and investors should begin to REALLY modify loans....with modifications that would actually benefit the homeowners...not just tacking on mortgage payments to drag out the life of the loan. How about suggesting modifications that would help the multitudes in AZ that are 50% under water?
Let's face it. America is out of money. Greece is out of money. The world's financial picture is bleak. Why continue to pay on an inflated product? Good business is good business. Strategic default makes excellent sense for many homeowners and can be a very wise financial decision.
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