According to a recent report, Tennessee saw a total of 40,733 foreclosure filings in 2009, a rate of one filing for every 67 households, far above the national average of one in every 45. While some of these Tennessee families could continue to afford their monthly mortgage payments, they chose to default on their mortgages because they found themselves deeply underwater on an overvalued property.
How Strategic Default Became a Viable Option
When the housing collapse struck, many big banks were hit with an avalanche of foreclosures, and they struggled to keep up with repossession paperwork. In one case, a bank employee says she approved 8,000 foreclosures a month. That rate of approval - nearly one every minute and 15 seconds - indicates lack of thorough review of documents. Some lenders have even announced a moratorium in some states on additional foreclosures while employees sort through the mess of faulty paperwork.
It may take months, or even years, for the bank to seize property when homeowners default. In the meantime, they are remaining in the house rent- and mortgage-free. Additionally, the homeowner may have no equity in the home if it was grossly overvalued at the peak of the real estate market.
Some estimates say that strategic defaulters may account for up to one-third of recent defaults but there is currently no way to track who is deliberately not paying.
Potential Consequences of Strategic Default
After the bank seizes the home, it will go up for sale, but likely at a lower price than the outstanding mortgage. In recourse states, the lender is then able to pursue the homeowner personally for the difference. For those without significant assets or income, or who have their money tied up in retirement or other exempt accounts, the bank may decide a collections lawsuit against the individual is not worth the expense.
Some argue against the morality of purposely not making payments that could be afforded. Others counter that a mortgage is more than a promise to repay the lender, it is a promise to repay the lender or to forfeit the home.
Those who default may suffer a lengthy negative impact to their credit scores and also find it more difficult to obtain a home loan in the future. Prior to making a decision whether to default on a mortgage, homeowners should consult with a knowledgeable bankruptcy attorney to determine how to protect their other assets and whether the bank can pursue them individually after repossessing the home.
