Strategic defaults are on the rise, writes Jon Maddux, CEO of YouWalkAway in the December 2011 issue of the Foreclosure News Report, a monthly newsletter published by RealtyTrac. In an article titled, “The Evolution of Strategic Default,” Maddux describes the evolution of strategic default since he founded YouWalkAway four years ago.
“We saw the term ‘walk away’ become ‘strategic default’ and news headlines go from ‘deadbeat homeowners walk away’ to ‘credit savvy borrowers choose strategic default,’” he wrote. “Clearly there is a socioeconomic shift in the way people are viewing foreclosure today. The stigma has been eroded and people feel they need to do what’s in the best interest of their family and themselves.
“People are coming to the conclusion that they made a bad financial decision in buying their home during the boom, and that they have been financially derailed from their goals,” Maddux continued. “Looking at a trajectory, they realize they have to make a choice now to make sure they can get back on track for their future.”
The pool of potential strategic defaulters is massive. As of January 2012, 12.5 million mortgage loans nationwide were in a negative equity position, or “underwater,” according to RealtyTrac data. We consider the loan underwater if the loan amount is at least 25 percent higher than the estimated value of the property securing the loan.
Those 12.5 million underwater loans represent 28 percent of the 45 million outstanding mortgage loans nationwide. The percentage underwater is much higher in some states like Nevada (62 percent), Michigan (56 percent), Florida (46 percent), and Arizona (44 percent).
Not only are strategic defaults rising, but wealthy homeowners are fighting foreclosure for longer, according to what we’re hearing from members of the RealtyTrac Agent Network.
For high-asset properties, “The buyers have deeper pockets, they have more lasting power and they have more legal representation … to stave off foreclosures,” said Mike Mazzone, principal broker at Park City Realty Group in Park City, Utah. “They’re just getting really creative with their legal team, but that only lasts for so long.”
So, where are we headed, according to Maddux?
“I see more and more people coming to terms with the fact that without a principle reduction, losing their home may be a step back in the right direction to improve their financial future,” he writes. “Strategic default is still a young phrase, but it has evolved over the last few years. It's not the “F” word any longer, and for many homeowners it has become a doorway back to freedom. I don’t feel strategic default should be someone’s first choice, however for some it may be their only one.”