Strategic Default: Is It a Good Decision?

Strategic defaulting, as opposed to economic defaulting, is the practice of homeowners voluntarily ceasing to pay the mortgage on their Magnolia TX real estate even though they have the financial ability to make the payments—and it is on the rise. This increase is generally attributed to the ever-growing number of underwater loans, falling home prices, the unemployment situation in the U.S., multiple “how-to” websites on-line, and advice from financial “experts.”

A recent study by the Mortgage Bankers Association warns that this practice may well have dire negative consequences on Magnolia TX real estate markets and points to widespread media coverage as the reason for the continuing growth of strategic defaulting. Recently, the overwhelming media coverage of the current financial crisis has made homeowners aware — or at least alerted them to become aware — of their equity position in their home,” said Michael Seiler who headed the study for MBA.

“While the merits of such a choice can and will continue to be debated, what is indisputable is that the possibility to strategically default has certainly been brought to the attention of current homeowners like never before, with potentially negative consequences for housing markets,” said Seiler.

For owners of Magnolia TX real estate who are experiencing or facing and underwater loan situation, the temptation to strategically default is often very powerful. After deciding not to make payments any more, the borrower can live free of the costs of a mortgage payment until the lender forecloses, which may take from several months to a year and may use this time to pay off or negotiate other debt.

There are, however, several negative consequences—on the owner and on the community– for taking such action. Personal repercussions include, but are not limited to, damage to one’s credit rating, inability to obtain another mortgage for a long period of time, and legal action by the lender to collect monies owned by the defaulting homeowner. However, the consequences of strategic default are not limited to the borrowers. Their neighbors are affected as well. Foreclosures cause the value of all the homes in a neighborhood to decrease simply because they will end up being sold at rock-bottom prices. Once that lower value is established as a recorded sale, it drags down appraised values for future sales. This is why strategic defaults can quickly be detrimental on a larger scale and should be considered a moral/ethical decision as well as a financial one.

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