Some homeowners underwater on their home loan — meaning they owe more on the mortgage than the home’s current value — are turning to “strategic defaults” in which they simply walk away from mortgage debt.
But financial experts warn — the cost of skipping out on mortgage debt can be high.
The American Bankers Association recently warned homeowners about the consequences of strategic default, including the possibility of the bank obtaining a judgment to pursue the homeowner’s assets, such as bank accounts, cars and investments.
A foreclosure — regardless of whether it is because of a strategic default or other circumstances — also hurts a consumer’s credit score. Foreclosures remain on a credit report for seven years, with the impact gradually lessening over time.
For someone who has a foreclosure on a credit report, the FICO score can generally begin to recover after a couple of years, assuming the consumer stays current with the payments on all the other credit accounts. In addition, a voluntary foreclosure can impact a homeowner’s ability to qualify for a new mortgage for years to come.
Tax liability is another danger of defaulting. Although the Mortgage Forgiveness Debt Relief Act of 2007 (extended through 2012) offers widespread protection from federal taxes following a foreclosure, state taxes still may be due on unpaid debt.
A lender also can pursue the remaining debt from an unpaid loan by obtaining a deficiency judgment against the delinquent borrower, or may work with a collection agency to recoup losses.
And, of course, ethical questions surround strategic defaults. A survey by Trulia.com and RealtyTrac found that 59 percent of homeowners would not consider defaulting no matter how much their mortgage was underwater, although another 41 percent of homeowners said they would consider a default.
We’re curious to know what you think. Would you consider a strategic default, or do you think it’s just plain unethical no matter what the circumstances? Give us your feedback and opinion by clicking the ‘comment’ link below. Your email address will never appear with your comments or feedback.