The national foreclosure rate rose 7 percent in the first quarter of 2010 and 16 percent from one year ago, according to a report by RealtyTrac. That figure equates to one in every 138 households facing default notices, auctions or bank repossessions in the first three months of this year. However, those percentages do not include the rising number of homeowners who are able to afford their mortgages, but are choosing to walk away from their homes.
Known as a strategic default, some homeowners who are financially capable of paying their mortgages choose to abandon their homes rather than maintain payments on a house whose value is now less than what they owe their lenders, reports Fox Business. According to the Financial Trust Index, the number of Americans willing to walk away from their mortgages increased by 41 percent since 2009. The index also reveals that nearly one-third of all mortgage loan defaults are strategic.
HomeAccount.com/Refinance.com co-founder Jack Pritchard told Fox Business that he is not surprised by the recent trend, pointing out that government programs aimed at making homes more affordable does not address the key issue of falling home values.
"The government should focus on the problem of equity destruction. Consumers can't rationalize this," Pritchard told Fox Business.
Because borrowers are still employed and able to afford the monthly mortgage bills, they may have difficulties negotiating loan reductions with the lender, reports Fox Business.
Alarmingly, the trend suggests Americans are less concerned about the negative effects that defaulting on a mortgage can have on their credit report. In an attempt to offset their negative credit marks, consumers may make a large loan purchase, such as a vehicle, to boost their credit and then abandon their mortgage, Fox Business reports.
Despite these tactics, strategic defaulters can still expect to see their credit score drop significantly and many professionals do not advise clients to risk the mark against their credit.
"I always dissuade people to avoid a strategic default," Florida real estate attorney Larry Tolchinsky told USA Today. "I tell them that it's going to ruin their credit. That's an asset that I want to maintain and protect," he said.
A good credit standing is pivotal to securing loans at low interest rates. Americans who strategically default may be spared from paying a high mortgage, but their credit report will remain tarnished for up to seven years.
Credit Score Articles
Lenders are seeing some homeowners strategically default on mortgages
5/10/2010 8:00:00 AM
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