In recent months, the national press has spotlighted a new type of foreclosure. It involves so called "strategic defaults," whereby homeowners can afford their mortgage but nevertheless choose to walk away. And it's happening here--in droves-- according to Seattle real estate attorney David Leen.
They are, in other words, not the broke and desperate homeowners we're using to reading about, the people who are months behind on their mortgage and ultimately arrive home one day to find a foreclosure notice stuck to their door.
Sure, strategic defaulters might find their mortgage a stretch. But their decision to give it up hinges on their realization that their property is now a bad investment, worth less than they're paying for it. "The other day, I talked to someone with a $3 million mortgage," Leen recalls. "The property is probably worth $950,000."
A couple years ago, people thought that housing values would rebound, Leen observes. And so they hung onto their house. But as prices continued to fall, many have decided to let go. A MSNBC story earlier this month cited one study that found that 30 percent of defaults in 2010 were by homeowners who could afford their mortgages.
Leen says he doesn't tell his clients whether to take this route. But he does clear up some misunderstandings that might be holding them back. "A lot of people don't understand how the foreclosure process works," he says. "They think of debtors prison, or that someone will garnish their wages. They don't understand that the bank just takes away your property in about 12 months and then you get to move on."
Unless you have a second mortgage, the property satisfies the debt, even if the bank is left short at a resale. The homeowner will take a credit hit, but not for as long as many people think. "You can always get a Sears credit card in a couple years," Leen says. And in any case, "a lot of people with means have no problem paying cash." They might even get approved for a new mortgage with some financial maneuvering, like paying a bigger down payment.
The housing industry rails against strategic defaults, portraying them as immoral and irresponsible. But The New Yorker's James Surowiecki called out the hypocrisy in that in a widely-read December article. Corporations like American Airlines walk away from their debt all the time despite having money in the bank, he wrote, so why shouldn't average homeowners?
Leen says of his clients: "They got wealthy by making sensible decisions, and now they're making another decision--to let something go when it's a loser."