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Strategic Defaults: I Hate to Say ‘I Told You So’ but…

Filed in Business Trends , Real Estate 5 comments

I’m not much for saying “I told you so” regarding my trends that will influence the markets in 2010, but this story of a young professional getting a free bachelor pad in the gorgeous sunshine state of Florida for 28 months (and counting) is just too newsworthy to pass up.

The details:

  • Owner purchased a Florida condo in 2005 for $210,000.
  • Put $20,000 as a down payment and financed $190,000.
  • As of April 2010, the condo is worth $45,000. (Not a misprint!)
  • His home/investment has lost 79% of pre-real estate bubble value.

Here’s the cool, or infuriating, part depending on your point of view.

  • Owner has not paid a single mortgage payment since December 2007.
  • January 2008 until April 2010 (28 months) has been free living (e.g. squatting).
  • Owner wants his lender to agree to principal reduction and/or interest rate reduction.

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I’m not sure if I should love this guy for his ingenuity in gaming the system (e.g. strategic default), or hate him for his lack of ethics. Personally, I think it sets a extremely negative tone by breaking his word since he signed a contract to repay a loan. Business wise, I think it’s a smart move to strategically default as long as his lender has no legal recourse against him other than tanking his credit score.

After all, many well known and well respected financial corporations are doing, and have done, many strategic defaults during the Great Recession, so why should a savvy, in-the-know homeowner be any different?

Regardless of our personal ethics, the more stories like this emerge and the popularity of walking away from an underwater mortgage embeds itself in U.S. culture, the faster the stigma of foreclosure and defaulting on your mortgage will dissipate from our social construct.

The result? A real estate market that will continue to bounce along the lows or continue it’s decline.

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Posted by CJ   @   26 April 2010 5 comments
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Apr 26, 2010
5:47 pm
#1 FrauTech :

Keep in mind all the people who walked away from homes or forclosed or short sold several years ago and now their lenders are asking them for the money they still owe. It’s not a quick fix. It’s more than just your credit score. I think it’s fair to skip a payment or two if your lender is unwilling to work with you and your situation has changed (i.e., unemployment). But what should it matter if your home dropped in value? You didn’t agree ONLY to pay it back while it suited you, you signed on to pay it back no matter what. It’s not like your lender gets more money out of YOU if the price had gone up. So I know plenty of people have no choice and have to walk away, they’d better keep in mind it might be more than just their credit score or seven years on their credit report. The mortgage company can ask for that money for the REST OF YOUR LIFE if you don’t work out a way to pay them back. Or you know, there’s always declaring bankruptcy, i guess if you’re willing to do that and lose all our other assets and savings than go right ahead.

Apr 27, 2010
5:33 pm
#2 cm :

It’s irresponsible of this blog post to not even mention the possibility that the collection agency Nazgul are going to be coming for this guy somewhere down the road, and it’s going to make “Return of the King” look like hide n’ seek at Timmy’s 5th birthday party.

Apr 27, 2010
6:53 pm
#3 Matt SF :

That’s why I included the statement…

as long as his lender has no legal recourse against him other than tanking his credit score.

Apr 29, 2010
9:39 pm
#4 Guy G. :

I can’t believe it. Well, I guess I can. I’m sure there’s cases like that here in Canada as well, I just haven’t heard of them. For our economy’s sake, I hope not too many more people do this as I’m sure it’s not helping the already limping banks.

Thanks for sharing,

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