Strategic default. Two words that could set you free. Or seal your doom.
When you took out a $200,000 mortgage to buy that house three years ago it felt like the home would pay for itself. The value seemed bound for $300,000 in no time. You would be sitting on a big profit that you could leverage to buy an even nicer home.
Things didn’t work out so well.
You still owe almost $200,000 on a split-level in a neighborhood riddled with “for sale” signs. The real estate pros say you would be lucky to get $120,000 in this market.
You’re underwater on your mortgage. The value of your property is upside down against the loan.
Strategic default.
You could just walk away from your mortgage. You would be breaking a contract,not the law.
Why,for the love of bank bailouts,should you keep throwing good money after bad?
“The vast majority of underwater homeowners continue to make their mortgage payments — even when they are hundreds of thousands of dollars underwater and have no reasonable prospect of recouping their losses,” Brent White,a University of Arizona law professor,noted in a report late last year.
Read more:Many underwater homeowners overpay to stay –KansasCity.com
According to an article at the Consumerist,Mr White also said in his paper, “Underwater and Not Walking Away:Shame,Fear and the Social Management of the Housing Crisis”:that “”Contrary to reports that homeowners are increasingly “walking away” from their mortgages,most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces:1) the desire to avoid the shame and guilt of foreclosure;and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover,these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option,but also the wisest financial decision. Unlike lenders,individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.”
Lewis Ranieri,chief executive of several major mortgage-related companies and one of the pioneers of the mortgage securities industry,responded in the Consumerist article by calling White’s entire argument “incredibly irresponsible and misinformed.”Not only is the professor urging consumers to break legally binding contracts,Ranieri said,but if large numbers of them did so it would send home mortgage rates soaring and “tear apart the very basis”upon which mortgage lending rests —the understanding that borrowers will honor their commitments and pay back the money they borrowed.
What do you think?
