Strategic Defaults or Walkaways–New Threats to Homeownership


We are hearing new and new words again and our real estate terminology is becoming richer every day. Until only couple years ago, we did not even know what is a short sale or deed in lieu. Now, a new word is becoming familiar every day and it is called strategic default. A strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.
This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house’s price such that the debt owed is (considerably) greater than the value of the property — the property negative equity or “underwater” — and is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are called “walkaways”.
Even distinguished economists Paul Krugman and Hal Varian have acknowledged that strategic default will be an inevitable result of the collapse of the finance and property bubble of the era following 2006. They also note that this is one of the few ways of freeing people from the burden of mortgage debt
The walkaways are the people who find themselves unable to meet their mortgage payments—and to solve the problem simply move out their belongings at night, drop their house key in the mailbox and disappear. In West Texas, largely because of walkaways, the Federal Government currently has 1,800 repossessed houses on its hands. In seven South Florida counties, walkaways have abandoned 3,000 FHA-homes. The rate of mortgage foreclosures has tripled during the past ten years, to an estimated 3.77 per 1,000 mortgages. Most housing economists agree that the leveling off of home prices in many parts of the U.S. accounts for most of the increase. As long as home prices were rising, a homeowner who could not meet his payments could always sell out—usually at a profit. Now, with prices steady, an overextended homeowner must either sell at a loss or face foreclosure.
WAlkAWAYS are done by homeowners who are financially savvy and had calculated that there is no outcome or light at the end of the tunnel. A strategic default is done by smart and educated people compared to Walkaways who are financially not that savvy and no solid jobs and can move easily. While strategic defaulters calculate and savvy and knows the financial market well. They have good income jobs and mostly both the spouses are working in middle income bracket.
Again, this walkaways and strategic default is a dangerous phenomenon and would nullify all the efforts by federal government in solving this home foreclosure crisis. If it continues, there would be no end in sight and it would engulf all of us. Our situation would not be different than say from Greece or Portugal.

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2 Comments

  1. i’m alreay on chapter 13, but i still can not catch up. i’m 65 years old and am still working. i have 2 pensions and on social security.i will never catch up. can i walk away and not loose my pensions and or ss?

    • I wonder who gave you the idea to file chapter 13. Chapter 13 deals with reorganization and only if you have arrears. However, if you are 65 years old and have pensions and social security—then more than likely you would be considred a judgment proof person. A judgment proof means even if someone sue and get a judgment, nothing can be done against you because no one can attach your social security. It is under federal law and garnishments are under state laws. Federal laws dominates over state laws. No one can touch your social security. They are untouchables!

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