Strategic default? Banks are on to you

Few states have been hit harder by the foreclosure mess than Florida.  Properties in some areas are worth half of what they were at their peak.  A sizable number of underwater borrowers — those owing more than their homes are currently worth — have simply stopped making payments on their mortgages, using the extra money to pay off other debts, and then forcing the lenders to take the property back through foreclosure proceedings.

It sticks a loss to the bank, of course, but banks aren’t taking this lying down.  Faced with over half a million borrowers (an estimate by Experian) banks are playing tougher:

  • They recognize the likely patterns and encourage the at-risk-of-defaulting homeowners to tough it out.  This keeps the payments coming in.
  • They go after defaulted borrowers with other legal avenues such as deficiency judgments to collect the difference between the sale price (after the foreclosure) and the amount owed.

Just because the foreclosure process is becoming more socially acceptable doesn’t mean that (a) there aren’t consequences, and (b) it’s not ethically wrong.  A house is a place to live first and foremost — not an investment first and foremost.  Cutting bait on paper losses is shortsighted, because the house still provides shelter.  It just hasn’t produced the double-digit gains investors were expecting.  Oh well.

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