Strategic Foreclosures Test Moralists
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
I knew that a discussion of strategic foreclosures on The CBS Early Show would invite lots of comments. Maggie Rodriguez and I discussed the trend of people who can afford their mortgage payments, but choose still to walk away, believing that it's a better long-term financial decision.
(Click here to watch the video).
When you hear that foreclosure filings fell 10% in Jan from Dec, don't get too excited. RealtyTrac said foreclosure filings rose by 15% in January from a year ago, and there are more than 4 million homes in the foreclosure pipeline, with no sign of abating.
While many of these 4 million homeowners really can't afford to stay in their homes, there's an emerging group who are making a strategic decision to walk away from their homes. It's hard to pinpoint the numbers but lawyers for mortgage companies are reporting increased incidence of strategic foreclosures.
Bankruptcy lawyers say that if homeowners are more than 20% under water, it may make more sense to walk away in order to improve cash flow. In many parts of the country, the monthly nut to carry the loan is often 2-3 times the comparable rent in the neighborhood. Homeowners are making the calculation that losing their down payments may be better than waiting 5-10 years to get their heads above water.
Additionally, many see financial institutions walking away from their obligations in the name of a "smart business decision" and wonder why they shouldn't do the same thing. That's what happened with the Tisch Company multi-billion default on Stuyvesant Town in New York.
Moments after appearing, I received an e-mail from a viewer asking about the responsibility of a commitment, which is of course what a mortgage is. He scolded me for presenting "a loss of ethically-based and responsibility-based decisions" that "focus only on making money."
I responded by saying that I understood his position–the moral imperative is difficult to argue. But from the research I have conducted, there appears to be certain times when it's better for a family to walk away and rebuild their lives, rather than stay mired in their current circumstances. It feels kind of revolting, but in the end, these folks will pay a steep price in their lives, including trashing their credit for seven years.
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