What is the cost of strategic default? There’s been a lot of recent news about this new type of consumer, born out of this recession. Although these borrowers can afford their mortgage payments, they choose to stop paying simply because they owe more on their mortgage than their home is worth. There has been a 9% increase in strategic defaults since March of 2009.
Some believe that a strategic default is an easy way to get out of an underwater mortgage. But consumers need to think carefully about all of the downsides to defaulting on their mortgages. One of the consequences of a strategic default is that it can significantly damage your credit standing. A lower credit score means you’ll pay higher interest rates on other debt, face higher insurance premiums, and confront serious limits on obtaining credit. Prospective employers, insurance companies, land lords and lenders are frequent users of credit information.
For example, borrowers who go through a strategic default likely won’t qualify for another mortgage. In June 2010, Fannie Mae announced that people who chose to use a strategic default would be barred from obtaining a Fannie Mae loan for seven years from the date of foreclosure. Fannie Mae loans currently account for about 40% of all consumer mortgage loan originations.
Banks are now very unlikely to allow strategic defaulters to walk away from a home they can still afford to make the payments on. Expect your lender to pursue repayment and attempt to collect on the debt.
Finally, the repercussions of strategic default are not limited to the borrowers. Their neighbors are affected as well. Foreclosures cause the value of all the homes in a neighborhood to decrease simply because they will end up being sold at rock-bottom prices. Once that lower value is established as a recorded sale, it drags down appraised values for future sales. This is why strategic defaults can quickly be detrimental on a larger scale. The economic health of entire cities depends in part on stable housing prices. A ripple effect caused by falling home values leads to decreased retail spending, less available jobs and even more foreclosures.
The decision to strategically default is not only a long-term financial decision but also a moral choice. Continuing to pay your mortgage or seeking help when you need it will support your good credit standing, your neighbors and your community.