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The Right or Wrong of Strategic Defaults. . Which Side Are You On?

Feb 09

filed under: Foreclosures & Short Sales, Real Estate

Strategic Default Jingle KeysThe other day I went out to preview some properties for a cash investor in the Queen Creek area. This client is looking to purchase a single family home in an area where he feels he can easily rent the property he would purchase. I quickly learned from one new home developer that was closing out his project that this would not be a problem. He had one investor that recently purchased three properties and had rented all three of them out before he closed escrow. He continued to tell me “his buyer had rented them out to homeowners that had purchased in the development some 4 or 5 years earlier and had made the decision to walk away from their homes, but wanted to stay in the neighborhood”.

This scenario where homeowners did not short sale their homes or wait for their lenders to foreclose is becoming very common . Conscious and well thought out decisions were made to turn in their keys to their lenders, and become part of the growing population of  “jingle mailers.” Some can even afford to make their mortgage payments. “How could they do that” you ask, “how irresponsible, they are hurting the value of my property because their home will end up being another foreclosure in the neighborhood”.

There are a number of reasons why a homeowner feels they are justified in participating in a strategic default.

  • Their homes are so far underwater and continuing to make payments adds up to throwing away money
  • Many do not qualify for loan modifications
  • They cannot refinance their homes
  • They can rent for half of what their mortgages are.
  • They have to survive, feed their families, save for college tuition, for them these are priorities over a mortgage payment.
  • The home they purchased was supposed to be an investment in their future, now they see it as a form of shelter, never being able to break even, just a financial burden they feel they cannot escape from.
  • If the financial institutions and Wall Street can walk from their financial obligations why can’t I.
  • Many of their friends have done it and are moving on with their lives and have not looked back.

Although these reasons are justifiable for the homeowners that have given their homes back to their lenders, many feel it is morally wrong,  “they entered into a contract and should honor it”. Your home has gone down in value and you’re having to deal with those consequences. I understand some of this reasoning, my home has significantly gone down in value along with yours. All this said I cannot judge these homeowners.

Is there really a “right or wrong” to this situation. Do we have a right to ask someone else to help maintain the values in our neighborhoods or live up to our morals and standards. Isn’t a mortgage a contract, people default on contracts every day and have the right to do so. These are tough economic times we are living in, these are not easy decisions for many of these homeowners, some young, some not so young, some with families, some not. Today, more than ever,  I am hearing someone say “you do what you have to do”. Then there’s always the age old idiom “walk a mile in my shoes”.

Written by Howard Harris