Walkaways or Strategic Default–New Threats to Homeownership?

[This post is not meant to provide a specific legal advice. However, you are welcome to contact the law office of Malik Ahmad for a first hand free consultation for 30 minutes on one-on-one basis for either chapter 7 or chapter 13 in Bankruptcy Courts of Nevada. Please bring all the collections papers with you along with your pay stubs, and bank statements]
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 real 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 stay so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are called “walkaways”.
Even distinguished economists like 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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8 Comments

  1. I regret the sloppy writing. It should have been read “While strategic and savy defaulters calculate and knows the financial market well”. I would soon update this posting. Thanks for reminding me. I like to tell you it was my fault, and by no means I claim to be perfect. Thanks again for reading.

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