Friday, August 12, 2011

Expect fallout from a strategic default

Some homeowners are duped into strategic defaults by fraudulent services offering faulty advice. Crooked mortgage relief services often tell homeowners to stop making payments to get the lender's attention for mortgage assistance.

by Broderick Perkins
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Deadline Newsroom - When you decide to quit making mortgage payments and walk away from home ownership, you are taking a walk down a slippery path.

It's a path to a "strategic default," which occurs when a homeowner, who can afford to make mortgage payments, but proactively decides not to in order to induce foreclosure.

The questionable strategy is often used by homeowners who are "underwater" with a mortgage that's larger than the home's value. The approach is more likely if the homeowner believes the home will take too long to recover sufficient equity and the homeowner also can rent a home for less than the mortgage payment.

Other homeowners are duped into strategic defaults by fraudulent services offering faulty advice. Crooked mortgage relief services often tell homeowners to stop making payments to get the lender's attention for mortgage assistance, say a mortgage modification or other loan workout.

Experian says in the second quarter this year, on average, 17 percent of mortgages with payments 60 days more or past due where those held by calculating homeowners bent on a strategic default. For homeowners with loan origination balances of more than $1 million, 33 percent of those 60 days or more late were strategic defaulters, Experian says.

For whatever reason, a strategic default is a risky proposition.

"Not paying your mortgage will have a far-reaching, long-lasting impact on your ability to secure future credit, regardless of the reason for your default," said Charles Chung, Experian’s president of decision analytics.

If you strategically default on your mortgage, you'll certainly be rid of a big mortgage payment, but the burdens you'll carry for years may not be worth the savings.

• Only bankruptcy is more damaging to your credit than a foreclosure. Even if you continue to pay your other bills the foreclosure remains on your credit report for seven years. Bankruptcy's black mark remains for 10 years.

• After a foreclosure, your credit score can drop 150 points or more, according to the leading credit scoring system (FICO) architect Fair Isaac Corp.

A credit score is a numerical rendition of information on your credit report. The FICO score ranges from about 350 to 850 — the higher the number the better your credit score and the better shot you have a the best credit rates and terms.

• After a foreclosure, any credit and insurance available to you will cost more and you could find it tough to rent a home. Employers can't get your score, but they can have a look at your credit report, in some states, under certain circumstances, but always only with your written consent.

• You could experience a tax hit if the lender forgives the difference resulting from a foreclosure sale price that's less than the mortgage balance.

• You also could face legal costs if the lender comes after you for the difference.

• Finally, last year, Fannie Mae implemented a policy that prohibits strategic defaulters from getting a new Fannie Mae-backed mortgage for seven years from the date of foreclosure.

"Some may see strategic default as a way to get out of paying a bad debt," Chung says. "But its associated costs, like a lower credit score, higher interest rates and less ability to secure future credits, can wipe out the financial benefit of no longer having a mortgage payment," Chung said.

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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop.

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