Default means, not keeping up your side of a contract, like, not making mortgage payments on time, which usually leads to a foreclosure.
Strategic default refers to people who can afford to pay their mortgages, but choose not to.
Most Michigan foreclosures are caused by increased mortgage payment, or lowered income, or a combination.
But we do have some strategic defaults.
Nationally, the estimate is 12% of mortgage defaults in February, 2010, up from 4% just three years earlier.
It is impossible to determine how many strategic defaults there are, the formula used by Morgan Stanley is this:
“The analysts classified a default as strategic only when homeowners who hadn’t been previously delinquent were making on- time payments one month, then skipped them for the next three, even while staying current on other consumer debt of at least $10,000.”
Why would someone current on their house payments, and on their other debt, stop paying the mortgage and risk foreclosure?
Because the house is now worth a lot less than what is owed.
One estimate is 20% of the US homes with a mortgage are underwater.
In Michigan, I believe it is over half.
There is a snowball effect, more foreclosures, more houses for sale, bigger supply decreases home values overall, putting even more homes underwater, resulting in even more foreclosures, and so on.
According to the Mortgage Bankers Association, we started the year with 4.58% of homes in foreclosure, and another 9.47% in default.
But the bailed out banks say their current programs are working, no need for them to lower principal balances to avoid foreclosures.
Now, I do not endorse people (or mortgage companies and banks) not paying their debts.
My services come into play when you can no longer afford to pay all of your bills, and have to look at other options.
In California and Arizona, strategic defaults are easier, because the mortgage company is stuck with the home, whatever it is worth, and cannot sue for any difference between what the home is worth and what is owed on the mortgage.
Not so in Michigan, where the mortgage company can sue for the difference in what they get the house for at a foreclosure sale, and what is owed on the mortgage note.
This assumes the foreclosure sale price was a market price.
To beat the drum again, judicial mortgage modification is the best remedy.
Strategic Defaults Increasing
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