Homeowners Are Resulting To Strategic Default In a Upside Down Housing Market

Foreclosures, delinquencies and loan losses have risen to record levels over the past year. Many analysts predict that foreclosures will continue to climb in 2011. As many underwater homeowners' assess their situation, and look for an exit strategy, strategic default has become a popular option. A strategic default is a deliberate decision made by the homeowner to default on their mortgage payment to achieve a specific and desired outcome. It appears to serve one of two main purposes-- to convince the bank to give the borrower a loan modification, or to let the borrower out of the loan, typically through a short sale or deed in lieu, while having the bank waive their right to collect on the deficiency. Many borrowers see this as an opportunity to allow them to build up their savings, while giving them time to protect their assets, and create a financial game plan toward getting back on track. While strategic default may look like a good option, Attorney Matt Englett warns that there are considerations that need to be made before making this choice. Englett advices that anyone considering this option should first contact a real estate attorney to analyze their situation. Some considerations that are taken into account when evaluating a borrower for a strategic default is whether the borrower lives in a recourse or non-recourse state. Florida for example, is a recourse state which allows the bank to pursue a deficiency judgment against the borrower. In Florida the bank has five years to pursue a deficiency judgment and as many as 20 years to collect on the judgment. There are additional factors that should also be taken into account when considering strategic default. Many states have specific requirements regarding the bank's ability to collect a deficiency. Some of these factors will depend on whether the home is the owner's primary residence, and if the loan is an original mortgage or a refinance. Attorney Matt Englett also warns that choosing strategic default will likely lower your credit score by approximately 140 points; however, it appears that many underwater homeowners do not mind the effect on their credit if it gets them out of their negative equity loan. Last year in Florida, strategic defaults were estimated to be 46 percent higher than they were in 2005.