More than half of all homeowners fearing foreclosure in Miami and South Florida are underwater on their mortgages and facing deficiency judgments. One Law School Professor says the smartest move is to walk away and don’t feel guilty about it. Loan Modifications aren’t working. Short sales put you out of your home. Banks won’t reduce principal balances. Strategic defaults are increasingly becoming the best financial decision for some borrowers.
Brent T. White, a University of Arizona law school professor, wrote new academic paper entitled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” His conclusion was that the 15 million U.S. homeowners underwater on their mortgages should stiff their lenders and take a hike. Many would save hundreds of thousands of dollars that they “have no reasonable prospect of recouping” in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume.
Professor White explains that while “credit scores get whacked when you walk away, “one can have a good credit rating again — meaning above 660 — within two years after a foreclosure” as long as you stay current with other creditors.
Better yet, homeowners can “strategically” default and make preparations for a few years of limited credit.
In Florida, many lenders may decide that it is not worth the legal expense to pursue walkaways, or our firm may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.
Professor White’s main point is that people let their emotions get in the way of clear financial thinking about mortgages. Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so. They often fall prey to “the social control of the housing crisis” — pressures and messages continually sent to consumers by the “social control agents,” namely banks, government and the media. The mantra that these agents — all the way up to President Obama — pound into owners’ heads, White said, is that “voluntarily defaulting on a mortgage is immoral.”
The other side of the coin for homeowners is that Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts. Only when homeowners cut through the emotional fog and default strategically in large numbers, White argues, will this inequitable situation be seriously addressed. The best chance many will have is to hire aggressive, competent counsel to fight for their financial freedom.