Strategic default: Difference between revisions
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A '''strategic default''' is the decision by a borrower to stop making payments on a home [[mortgage]] despite having the financial ability to make the payments. Usually this occurs after a substantial drop in the [[ |
A '''strategic default''' is the decision by a borrower to stop making payments on a home [[mortgage]] despite having the financial ability to make the payments. Usually this occurs after a substantial drop in the [[real estate pricing|house's price]] such that the [[negative equity|debt owed is considerably greater than the value of the property]], and is expected to remain so for the foreseeable future. Such borrowers are called "walkaways."<ref>{{cite web |
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|url=http://www.time.com/time/magazine/article/0,9171,827500,00.html |
|url=http://www.time.com/time/magazine/article/0,9171,827500,00.html |
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|title=Credit: Beware of the Walkaways |
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|date=1962-07-27}}</ref> |
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A number of distinguished economists(Krugman & 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. Once free of the mortgage debtors are free to use their income for other expenditures.<ref>{{cite web |
A number of distinguished economists(Krugman & Varian) have acknowledged that strategic default will be an inevitable result of the collapse of the [[United States housing bubble|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. Once free of the mortgage debtors are free to use their income for other expenditures.<ref>{{cite web |
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|url=http://krugman.blogs.nytimes.com/2008/02/12/one-to-the-left/ |
|url=http://krugman.blogs.nytimes.com/2008/02/12/one-to-the-left/ |
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|title=One to the Left |
|title=One to the Left |
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Revision as of 16:36, 18 December 2009
A strategic default is the decision by a borrower to stop making payments on a home mortgage despite having the financial ability to make the payments. Usually this occurs after a substantial drop in the house's price such that the debt owed is considerably greater than the value of the property, and is expected to remain so for the foreseeable future. Such borrowers are called "walkaways."[1]
A number of distinguished economists(Krugman & 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. Once free of the mortgage debtors are free to use their income for other expenditures.[2]
The borrower after deciding to not make payments any more can live (free of the costs of payment or rent) until the lender forecloses which may take from several months to years. A borrower may use this time to extinguish or negotiate other debt. Mortgage lenders may negotiate with defaulting borrowers to assure maintenance and occupancy of the property until the lender can take title and market the house, and may provide the defaulting borrow with greater than the minimum legal notice to quit (which can be as little as three days) and may even agree to pay a fee to leave the home in pristine condition.
Foreclosure of the borrower's house will result in a negative entry on the borrower's credit rating, possibly making obtaining loans in the future more difficult or more expensive for the borrower. With otherwise good credit a new mortgage from US government agencies will be denied until 3 (FHA) to 5 years (FNMA) have passed since the actual date of foreclosure.
The difference between the value of the property at the time of foreclosure and the amount of the note (assuming the note is larger) is considered by the IRS as "debt forgiven" and is "income" subject to income tax. For a short period ending at the end of December 2012 due to a change in law (The Mortgage Forgiveness Debt Relief Act of 2007) this "phantom income" will not be subject to tax.
A study in September 2009 from the credit reporting agency Experian and consulting outfit Oliver Wyman estimated that close to a fifth of troubled mortgages in the U.S. involved borrowers who were "strategically" defaulting.[3]
References
- ^ "Credit: Beware of the Walkaways". Time. 1962-07-27.
- ^ "One to the Left". New York Times. 2008-02-12.
- ^ Gimein, Mark (2009-10-08). "Go Ahead, Walk Away: There is nothing immoral about ditching your mortgage". The Big Money.
External links
- Moral and Social Constraints to Strategic Default on Mortgages (pdf)
- [1]
- [2]
- American Dream 2: Default, Then Rent
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