Miami and South Florida has a new trend to add to record levels of foreclosures, delinquencies and loan losses. Many distressed homeowners are choosing strategic defaults or walkaways. Surprisingly, borrowers with good credit are more likely to walk away from home underwater than a subprime mortgage borrower.
A “strategic default” occurs when a borrower abruptly and intentionally stops paying mortgage. Using a massive sample of 24 million individual credit files, researchers found homeowners with high credit scores are 50 percent more likely to walk away than lower-scoring mortgage borrowers. Many who chose a strategic default understand the consequences of what they’re doing. They are clearly sophisticated. They usually are selective about payments they make. For instance, they often pay home equity lines until they bail on their first mortgage and many draw down more cash on the equity line.
Recently, the national credit bureau, Experian, identified the characteristics and debt management behavior of homeowners who bail out of their mortgages. They found 588,000 strategic defaults nationwide in 2008, more twice the number from 2007. Eighteen percent of all serious delinquencies lasting over 60 days are strategic defaults.
Strategic defaulters go from perfect payment histories to no payments at all. Most distressed borrowers try to keep paying their mortgage after they’ve fallen behind. They want to save their homes, not dump them.
If you are considering a strategic default, know your credit scores will be severely hit. Many see it as the only practical solution to deal with their negative equity. Strategic defaults are found everywhere that home values boomed and cratered since 2006. In Florida last year, the number of strategic defaults was 46 times higher than in 2005. In other parts of America, defaults were about 9 times higher in 2008 than in 2005.
There are dangers in trying a strategic default without strong foreclosure defense counsel. You will lose points on your credit score and may ultimately get hit with a deficiency judgment. The best advice is to fight back against the bank to make sure they have reason to waive the deficiency and let you walk away.