One of the great benefits of a loan modification used to prevent a foreclosure is that it is a deal between the bank and the debtors. The financial institutions do not want to go through a costly process of taking the house back only to have it sell for far less than it is worth, and the homeowners wish to remain in their property if only they had a second chance after a hardship and a manageable affordable monthly payment.
But this benefit of compromise can be a setback if the property is too far underwater to make it worthwhile for either the owners or the banks to meet in the middle. And with the drastic decrease in home values over the past few years, more homeowners are turning to strategic default as a way to sidestep being evicted or being made to pay for a house that is too expensive and not worth anywhere near the principal balance owed on the loan.
Conventional wisdom would have us believe that foreclosure is a last resort for borrowers who have come to the brink of financial disaster and can simply no longer afford to make payments. But in the current real estate market, this is not always the case anymore. A growing number of homeowners are treating the loss of equity in their homes as a business decision and walking away, letting the bank have the house back.
With almost a quarter of the American housing market going under, can anyone blame homeowners for choosing to default on their loans? While there are consequences for taking this action, such as foreclosure and a severely damaged credit score, they seem like better alternatives for many people than paying hundreds of thousands of dollars more than a house is worth over the life of fifteen or thirty years.
Even if loan modification could be an option for certain borrowers who have lost all of their equity due to a declining market, strategic default often happens when the owners are not behind on monthly payments. And borrowers who have not become tardy in payments are usually not eligible for a modification program. The financial institutions banks are only willing to modify loans for those who are facing a financial hardship and have become delinquent on several monthly mortgage bills.
This means that the banks are mostly unwilling to work with owners who are concerned about spending too much money in the future on a house that is not worth what they have agreed to pay on it. And the only consequence is a civil lawsuit resulting in the loss of the house and a poor credit record. Neither of these are quite as disturbing as dedicating the next few decades of one's life to spending hundreds of thousands of dollars more on a piece of real estate than it is worth.
Strategic default is a phenomena that can not be fixed by increasing government programs to prop up home values or by financial institutions offering loan modifications to borrowers that do not dramatically decrease principal balances owed. People with no equity in their homes already feel they have no ownership – giving up the costly monthly payment is often worth the terrible credit. And low credit only lasts for seven years, while a mortgage that can not be refinanced on a house that can not be sold will go on for decades.
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