The Wall Street Journal published an article this past Tuesday by James R. Hagerty on “strategic mortgage defaults.”Aa “strategic default” occurs when a homeowner who can afford to make mortgage payments decides to stop paying and allowing the bank to foreclose. The article states that strategic defaults are often motivated by “anger, fear or despair.” Mr. Hagerty states that strategic defaults may be rational response by underwater homeowners. In any event, the percentage of mortgage defaults by people who could afford payments has risen substantially in the past two years. The article suggest ways to reduce strategic defaults.
In my asset protection practice I have consulted with many, many people about the consequences of voluntary mortgage defaults. In most, but not all cases, I have advised my clients whose homes are substantially upside down in value to let the bank foreclose rather than deplete retirement funds and savings accounts. Up to now, this advice has turned out well for most, if not all, of my clients facing foreclosure. I and my clients have found that most large banks are not aggressively pursuing either deficiency claims or the collection of deficiency judgments.
One change that would deter “strategic defaults” is the mortgage lenders getting much tougher pursuing deficiency judgments. People believe that if they default on a credit card or car payment the creditor is likely to sue them for the money; people are not as afraid of mortgage lenders. I know, from speaking with people in the banking industry, that mortgage banks have good reasons for not aggressively pursuing collections of homeowners’ personal liability on mortgages.
When mortgage lenders have had enough strategic defaults; when they want people to exhaust all their money and assets before they walk away from their mortgages, I think one of the first things the lenders should do is get tough and get mean. People act rationally when they voluntarily withhold payments to lenders whom they do not fear.
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