When is it Worth Giving Up on a Property?

One of the great benefits of a loan modification used to prevent a foreclosure is that it is a compromise between the bank and the debtors. The lenders do not want to go through an expensive process of taking the home back just to see it sell for much less than it is valued, and the borrowers wish to remain in their property if only they had a second chance after a hardship and a manageable affordable monthly payment.

But this benefit of compromise can be a drawback if the property is too far underwater to make it worthwhile for either the owners or the lenders to meet in the middle. And with the sharp drop in home values over the past few years, more debtors are using strategic default as a way to sidestep being evicted or being made to pay for a home that is too expensive and not worth anywhere near the principal balance owed on the mortgage.

Conventional wisdom would have us believe that foreclosure is a last resort for borrowers who have come to the brink of financial disaster and can simply no longer afford to make payments. But in the current real estate situation, this is not always the case anymore. A growing number of borrowers are treating the loss of equity in their homes as a business decision and walking away, letting the bank have the house back.

With nearly twenty-five percent of the American housing market going under, can anyone blame homeowners for deciding to default on their loans? While there are consequences for taking this decision, such as foreclosure and a severely decreased credit score, they seem like better alternatives for many people than paying hundreds of thousands of dollars more than a property is worth over the course of fifteen or thirty years.

Even if loan modification could be an option for certain borrowers who have lost all of their equity due to a declining market, strategic default often happens when the owners are not behind on monthly payments. And owners who have not become delinquent in payments are usually not qualified for a modification plan. The financial institutions banks are only willing to modify loans for those who are facing a financial hardship and have become delinquent on several monthly mortgage bills.

This means that the lenders are mostly unwilling to work with owners who are concerned about spending too much income in the future on a house that is not worth what they have agreed to pay on it. And the only consequence is a civil lawsuit resulting in the loss of the home and a poor credit record. Neither of these are quite as disturbing as dedicating the next few decades of one's life to spending hundreds of thousands of dollars more on a piece of real estate than it is worth.

Strategic default is a problem that can not be fixed by creating government programs to prop up home values or by banks offering loan modifications to borrowers that do not dramatically lower principal balances owed. People with no equity in their homes already feel they have no ownership - giving up the costly monthly payment is often worth the bad credit. And low credit only lasts for seven years, while a mortgage that can not be refinanced on a home that can not be sold will survive for decades.