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Tuesday, September 14, 2010

Strategic Mortgage Defaults on the Rise

Strategic defaults are becoming more common.

They work like this: The borrower owes $250,000 on a home that’s now worth $200,000. They stop paying the mortgage, but it takes the bank six months to a year to foreclose and evict the borrower. Meanwhile, he or she pays no house payments and the bank absorbs the negative equity.

The drawback for the borrower is damaged credit and the possibility in some states that the bank will sue for a deficiency judgment.

Paola Sapienza, a professor of finance at Northwestern University and an expert on strategic defaults, points to what he calls the "contagion effect." As the practice gets more common, the stigma declines and more people say, "Look I've done it, and I'm fine."

Source: St. Louis Post-Dispatch, Stephen Deere (09/12/2010)


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  2. There may be many reasons for mortgage defaults strategically. The main reason is that the property has a mortgage against the fair value is significantly lower than the principle of balance between the landlord to pay a mortgage. By default strategic mortgage, the owner has achieved over the assets of the debt service is a property that we can achieve a positive return, at least in the short term.

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  4. I don't see the bank just forgiving and forgetting about taking the financial hit. Not only does this ruin your credit but the bank may have a judgement vs you, and youll have to make payments anyway...

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