Will 2011 Be a Banner Year for Strategic Defaults?

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In reference to my previous articles and blogs (“It May Be Financially Irresponsible to Pay Your Mortgage” and “Why a Strategic Mortgage Default May Be Your Best Option),” I discussed this topic at great length. I talked about why there is no moral obligation in the purchase contract. The mortgage is a legal contract, not a moral promise. I explained why turning over the keys to the home is fulfilling the terms of the contract. I wrote about how big government and the Wall Street Banksters (yes, I repeat myself) have worked to shame people into staying in their mortgage loans for the benefit of collective “consumer confidence,” the big, bailed-out banks, Fannie Mae and Freddie Mac, and the ownership society that keeps the middle class tied down in perpetual debt while selling a phony moral obligation.

Here is a recent chart from USA Today where it is said that “at least half of homeowners with a mortgage owe more than their homes are worth in 17 of 386 U.S. counties.”

HuffPo ran an article this week titled, “Learning to Walk: Fear, Shame and Your Underwater Mortgage.” First, let me point out an issue with this original article. You will see the article was published on 2/3 with an update on 2/4. The first sentence of the article reads, “Nearly 1 in every 4 U.S. homeowners with mortgages owe more on their home than it’s worth.” While that is true, the original posting that I read stated, “Nearly 1 in every 4 U.S. homeowners across the country owe more on their home than it’s worth.” Since not every home has a mortgage, this was a dreadful mistake that was corrected, and fairly quickly. Still, the overall article offers an excellent picture of the “walk” option.

Additionally, the Wall Street Journal recently ran a piece where this paragraph stands out:

The problem also is concentrated in several states. Arizona, California, Florida, Michigan and Nevada had about 31% of mortgaged homes but 53% of underwater ones.

This story also puts a dust-bunny spin on homes that are ‘barely underwater,’ ignoring the still-sinking housing market; a busting economy as government stimulus money runs dry; and the negative psychological impact – that can be devastating for some folks – of trying to keep a financially sinking ship afloat. A paragraph from the article:

“At least as important” as the number of underwater homes, says housing economist Tom Lawler, “is the percent that are materially underwater. Would you seriously consider wasting your credit because you owe $5,000 more than you think your home is worth?”

This simplistic and childish statement, from an economist, completely ignores the larger, objective financial picture, including an individual’s cash flow situation. Each person has a distinct financial picture that can be objectively assessed, with various qualitative factors influencing their decision. Walking away from an underwater home – even “barely” underwater – also includes walking away from the associated taxes, potentially overwhelming maintenance costs, and the personal burden (money and time) of maintaining a home that, from your perspective, is a sinking ship. The mental stress, for some people, can have a huge effect on peoples’ lives and happiness and health. There is also the ‘own a sinking ship that drains resources’ vs ‘worry-free rent option’ analysis that determines a person’s (or family’s) optimum financial course of action. The decision to walk away is not so simple as subtracting two numbers to see “how close you are.”

7:43 pm on February 8, 2011