Strategic Default in Orange County

Most homeowners with distressed mortgages fight all the way to the end. They spend months or even years scrambling to find the money to stay current on their mortgage payments, subjecting themselves and their families to significant economic hardship in the process. The mortgage payment becomes the vacuum which consumes most of the family's income, making it difficult or impossible to afford a comfortable standard of living, and every month becomes a struggle to make ends meet.

No matter how hard they try, countless homeowners in this situation end up losing their homes to foreclosure anyway. Many of them would be better off taking the course of action which is known as strategic default.

Strategic Default Explained

Strategic default is commonly referred to as jingle mail, based on the image of the homeowner simply mailing the house keys to the bank as a way to surrender possession of the home. It's not actually this simple, but it is far simpler than a short sale, a foreclosure defense lawsuit or even a deed in lieu of foreclosure.

Strategic default is most commonly used in situations where a mortgage is underwater and where the homeowner does not expect that the situation will turn around any time soon. Rather than pouring money into a mortgage with no equity that will likely end in foreclosure, the individual decides to simply walk away from the mortgage.

Advantages and Disadvantages of Strategic Default

A strategic default is not a perfect solution, but in many cases it is the best one available. It will have the same effect on your credit report as a foreclosure, and you may still be required to pay taxes on the balance that remains on the loan after the bank sells the property.

On the other hand, you may be able to remain in the house for several months before the bank finally gets around to repossessing the property, meaning that you would be able to use the money you are not spending on your mortgage to pay down your other debts and get into a more stable financial position for when you do move.

Is strategic default moral?

One of the main things that prevents homeowners from using strategic default is the concern that it would be unethical to do so. While this concern is understandable, most economists and real estate professionals take a different view, and instead look at strategic default as a financial decision that does not necessarily carry moral implications. Look at the situation from another angle: would the bank subject itself to the same types of hardships and stresses that you are currently experiencing in order to avoid disappointing you? No.

Banks and other mortgage lenders make decisions based on calculations of potential profit and loss. In fact, the risk of default has already been calculated into the rate you are currently paying on your mortgage. Given that the housing market downturn that has left so many homeowners with upside-down mortgages was largely due to the banks' own eagerness to offer subprime loans and even to engage in predatory lending, it is only just that they should suffer some of the blowback from their own actions.