Should You Strategically Default?
The Dynamic Wealth Report
February 12, 2010
by Corey Williams, Editor
Yesterday, RealtyTrac released their January 2010 Foreclosure
Market Report. The report provides a look at foreclosure activity for
the month. I’m shocked by what I read.
A whopping 315,716 US properties had some sort of foreclosure filing in
January. That’s one in every 409 US households. And it’s the 11th
consecutive month 300,000 or more homes received a foreclosure filing.
Foreclosure activity is up 15% over January 2009.
Clearly the US housing market’s still suffering badly. This is a bad
sign for homeowners.
Record numbers of homeowners now owe more on their mortgage than what
their home is worth. It’s known as being “underwater”.
Homeowners who are underwater are faced with a tough choice. They can
continue to pay their mortgage and hope real estate prices recover, or
they can choose to “strategically default”.
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A strategic default is when a homeowner who’s underwater on their
mortgage, but can still afford the payments, chooses to walk away and
let the lender foreclose.
The hard reality for many homeowners is a strategic default may be their
best choice.
Homeowners who bought near the peak of the market have very little
chance of seeing their home values rise to breakeven levels. That’s
because the loose lending practices that fueled the boom are unlikely to
ever return.
So from a purely financial standpoint, defaulting on your mortgage is the
best option. It’s just like cutting your loss on a stock that’s
plummeted in value. It’s better to take the loss and move on than it is
to hold and hope.
The problem is most homeowners won’t walk away unless they have no other
choice. They feel a moral obligation to keep paying their mortgage even
if it’s not in their own best interest.
And, lenders are taking advantage of this moral dilemma. They’re preying
on homeowners' sense of morality to line their own pockets. Lenders are
stubbornly refusing to negotiate with homeowners.
They believe they’re serving their own interests by refusing to
renegotiate the terms of existing loans. And I’m sure some people will
never stop making payments, even if the property value falls to zero.
But the RealtyTrac report tells me strategic defaults are becoming an
acceptable means to deal with an underwater home.
Unfortunately, lenders don’t realize the rules of the game are changing.
More and more people are going to walk away unless lenders work with
homeowners to reduce the principle on their mortgage.
Sadly, I don’t think that day will ever come. The hard reality for
underwater homeowners is, the sooner you walk away, the better off
you’ll be.
It’s the same principles as when you’re investing in any other asset
class. Cut your losers short…
It’s time to get over the moral implications of cutting a loss on real
estate and do what’s in your own best interest.
• Marriott (MAR) was upgraded by Oppenheimer this
week. They now have an outperform rating and a $25 price target on the
stock. The company beat Q4 earnings estimates and their outlook for 2010
has improved.
• Coinstar (CSTR) was downgraded to hold by Brigantine. The company announced Q4 and full year earnings in line with analyst
estimates yesterday.
• Barclays Capital started coverage on Under Armour
(UA) this week with an overweight rating. The company recently upgraded
their 2010 outlook. They’re expecting EPS of $1 on revenue of $913
million.
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