More Americans Seek Debt Relief Through Strategic Mortgage Defaults

[Sep 28, 2009.]

 

It’s a scenario that was unthinkable a decade ago, and would have caused previous generations of Americans to live in shame. Yet, desperate economic forecasts and spiraling income rates in some parts of the country have caused more Americans than ever to walk away from their mortgages. This unorthodox attempt at debt relief has even earned its own formal banking industry terminology: strategic mortgage defaults.

The thinking goes like this...

A homeowner with otherwise good credit may have found herself upside down on home equity or facing a severe uptick in monthly payments due to the expiration of a promotional ARM. Thanks to today’s bizarre economic climate, some consumers might find it far easier to justify stopping payments on their mortgage instead of using a debt consolidation loan to help balance their budgets. The reasons for considering a strategic mortgage default vary from homeowner to homeowner, and from state to state:

• Some homeowners cannot find a lender willing to offer a refinance deal for a home that has decreased in value. Walking away from a mortgage may force some lenders to enter loan modification talks.


• Some homeowners facing sudden illness or loss of work are gambling that overburdened loan officers will take a long time to force them into foreclosure. By that time, they assume, their income will be restored and they will be able to catch up on missed payments.


• A fraction of homeowners seeking strategic mortgage defaults recently purchased new homes or completed moves while they were unable to sell their previous homes. Walking away from their previous mortgage is a last resort debt relief option for Americans who can no longer afford to make two mortgage payments while one home sits on a slow real estate market.

A recent study on debt relief by credit reporting bureau Experian reveals that most of the Americans participating in strategic mortgage default show no other outward signs of economic stress: no missed or late payments, few credit card defaults, no visible struggles with debt. The statistics lead researchers to conclude that some Americans have made calculated moves, putting their credit scores at risk for a short term financial gain.

However, leading financial industry experts and personal finance advisors worry about the signs indicating a trend in strategic mortgage default, especially among Americans who have struggled with debt. Just as prosecutors have combated phony debt relief companies, law enforcement officials worry about an uptick in the number of fraudsters who may force desperate homeowners to walk away from their mortgages after pocketing heavy fees.

Consumers facing financial challenges have plenty of other options, experts say. Many mortgage lenders offer free debt consolidation advice, along with programs designed to help homeowners rebalance their finances to get through tough times. While full refinances may be harder to come by, relaxed guidelines for consolidation loans can help some homeowners who previously did not qualify for traditional cash-out refinancing. With statistics indicating that nearly 600,000 Americans walked away from their homes in 2008, lenders understand the importance of acting early to prevent future mortgage defaults.

 

About Author:

Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.