A recent report released by Corelogic, a leading provider of financial, property and consumer information, found that 22.7% of American homeowners have an “underwater mortgage” for the quarter ending April 30, 2011. This means about 11 million borrowers owe more than their home would appraise for in today's depressed real estate market. Compared to the period ending December 31, 2010, 23.1% of homeowners found themselves with negative equity their homes.
Nevada leads the way, with about 63% of homeowners in trouble. Arizona, Florida, Michigan, and California have the next largest percentages of underwater mortgages. Strategic defaults were virtually unheard of during normal economic times. Most mortgage lenders required borrowers to put down 20% of the home's cost. This ensured borrowers had the financial “skin” motivation to honor their mortgage commitments.
In addition, borrowers had to meet strict underwriting requirements, including two years of solid employment, sufficient income, and other conditions. If homeowners default on their loans, lenders simply foreclose on dwellings to recoup amount of the outstanding loans and any legal costs. However, lax lending standards, spiraling home prices, and the eventual collapse of the economy, co-joined to create the current environment.
Even a series of programs, designed to help millions of homeowners with underwater mortgages out of the crisis, have proven ill conceived and fall woefully short of the expected results. Mortgage lenders have also demonstrated an inability to responsive effectively to the dilemma faced by many well-meaning borrowers.
To Strategic Default or Not
Many people wrestle with their own personal moral dilemma when it comes to strategic default. Often, direct or indirect pressure from the government, financial industry, and other forces, exacerbate the issue and may pressure individuals to make decisions against their own best interests. Keep in mind, the key word - “strategic.”
For many homeowners, strategic default seems to offer the only sure way from under the financial burden. If a strategic default improve ones financial condition emotional well-being, than the choice comes down to one of personal survival. For people considering this option, it's critical to evaluate the consequences of walking away; below are some factors to consider.
Prepare yourself for the bashing your credit score will take; it could plunge anywhere from 300 to 400 points. It seems rather odd considering today's economy, but more employers use credit reports as a component of the evaluation process for potential employees. In addition, some credit card companies conduct periodic reviews of customer credit profiles to note changes in financial condition. Missed mortgage payments or a foreclosure could result reduced credit limit higher interest rate, or a canceled credit card altogether.
Another credit consequence, the negative information remains on your credit profile for seven years, which makes it nearly impossible to obtain a mortgage. Also, expect to pay more in interest for any money or credit you can obtain.
A judgment deficiency occurs when a foreclosure sale does not generate enough proceeds to pay off the outstanding mortgage debt and costs of foreclosure proceedings. In some states, the law allows lenders to seek a deficiency judgment against homeowners. When you consider the markets where home values have taken a significant drop, a deficiency judgment can amount to tens or hundreds of thousands of dollars. For example, a home purchased for $306,086 in Las Vegas, Nevada, at the peak of the real estate market in May 2006, now has an estimated value of $120,334 - a decline in value of 60.7 percent.
Walking away from the home could result in a $185,752 deficiency judgment before adding costs. In non-recourse states, regulations prohibits lender from seeking recourse beyond foreclosing on the property. Currently, 12 states have non-recourse rules: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington
The fact is that most rental companies require a credit check and will deny your rental application. Avoid this problem by securing a unit before the negative information shows on your credit report. Another approach involves looking for an apartment, condominium, townhouse or small apartment building owned by a private property owner. Many do not conduct credit checks and may empathize with your situation if you present to them up front. Some landlords, even large complexes operated by property management entities, will rent to someone with bad credit, but may request a co-signer.
The Mortgage Forgiveness Debt Relief Act of 2007, which expires December 31, 2012, gives homeowners who go through foreclosure exclusion on their federal income taxes, for the difference between the outstanding balance mortgage and the debt amount forgiven by the lender. In the past, the IRS treated forgiven debt taxable income. Some jurisdictions, such as California and Pennsylvania have passed similar legislation. However, the laws differ from state to state, so check the rules in your location. The rules only apply to primary residences.
Make sure you understand the financial legal and emotional consequence walking away. Only you can make the best decision for you and your family. For, unemployed homeowners, or people experiencing other financial problems, draining your savings to make bloated monthly mortgage payments may not make financial sense. Even legitimate financial experts have recommended strategic default as a option in an unprecedented economic environment.