A "strategic default" currently means walking away from an underwater home even though the owner could afford to pay the mortgage. However, this represents far less than half of walkaways. The vast majority of foreclosures happen to people who cannot afford to pay the mortgage.
Portrayals of strategic default in 2009 were typically of homeowners who "used their home as an ATM," or "deadbeats." Even news stories describing the positive side of default didn't entirely shake those images. One of the earliest semi-positive stories was in the Wall St. Journal, titled "American Dream 2: Default, Then Rent." This article described a couple who had defaulted, cut their housing costs from nearly $4,000/month to just over $2,000/month, and were living in a bigger house with "a swimming pool with three waterfalls." Another strategic defaulter in the same article found the benefits of default-and-rent included the discretionary income to go out to dinner more often, and hang on to his series-6 BMW.
These are not the people I meet in the course of interviewing and writing about surviving tough times. The people I meet are laid off, or from two incomes down to one, or on their way to medical bankruptcy. They cannot imagine a swimming pool, much less a waterfall -- they just have bills they can't pay, one of which is the mortgage. Some are slow in adjusting to the "new normal," and still eat out regularly, but others have already cut back to eating out four times a year.
Their home may be underwater -- or they may have equity. Often it doesn't matter, when the bottom line is that they have to choose between the mortgage and medical insurance -- because losing medical insurance in America is potentially lethal.
For this group, it is not a matter of cunningly defaulting to maintain a latte-sipping lifestyle. It is a matter of prudently walking away from the mortgage that is dragging their family and future under the waves.
The benefit for people who act both prudently and decisively can be startling. Taking a fairly typical example from people I've interviewed, this is the family's financial situation:
They have done a careful financial projection. The total monthly expenses are $5,000, right down to the last dime -- which includes $2,500/month on mortgage and credit card bills. That says that if the main breadwinner is not fully employed in 14 months, they will lose the home -- and of course take a dip in their credit rating. And if the job doesn't come until the 13th month, it had better be at the same salary as the previous job, or they'll lose the home anyway.
Scenario A: Betting on a job, and continuing to pay the mortgage (a.k.a. "doing the right thing," according to the moralists). They guess that they will be fully employed again in time to save the home. They continue paying mortgage, car payments, and minimum monthly credit card payments. If their bet is wrong, their trajectory is shown by the red line below.
Scenario B: Prudently walking away. They decide that getting a job might require a career shift or relocation, with some time and money invested in re-education. They immediately stop paying the mortgage and credit card payments. In this scenario, they cut their expenses by $2,500/month (which rises to $3,500/month when they move out and start paying rent). If there is real equity in their financed car, they sell it and buy a used car to replace it.
The difference between A and B is incredible. If the family bets the primary bread-winner will be working within the year and is wrong, they could be leaving their home without enough money to rent a decent apartment in 14 months -- exhausted, frightened, and possibly running on bald tires. (People who "do the right thing" tend to leave long before they actually get legal notice to move.)
The family that bets the primary bread-winner will not find a job in 13 months and stops paying the debts will be leaving their home with $33,000 cash in hand, move to a rental (usually in the same school district, if need be), and will have three years for the primary bread-winner to find a job. And that's their worst scenario -- it's quite likely they'll be in the house for 18-24 months without making any mortgage payments.
Conclusion: when the writing is on the wall, the best plan is often a prudent walkaway -- an escape to the future, equipped with enough cash to get there.
"Oh my God, I said out loud but to myself… they’re reinforcing the image that the people losing homes shouldn’t have bought them in the first place. Empty homes with trash piled everywhere, graffiti on walls, tiny little box homes… this is supposed to be representative of who’s losing homes today? Like he(( it is. Then again… it occurred to me that the Anderson Family so rarely stops to pose for a photo-op in front of their Volvo before driving away from their foreclosed home for the last time."
http://mandelman.ml-implode.com/2010/12/breakthrough-why-americans-are-allowing-the-foreclosure-crisis-to-continue/
The thing to remember is, the regular ol middle class American didn't make this happen. The smartest guys in the rooms on Wall St did. See the Federal Reserve report; 23% of middle income wealth lost 2007-2009.
I'm glad to see some holdouts among the state AG's on the "settlement". These banksters need grillin'.
The "FICO before family" mentality is particularly frustrating when there are kids involved, because while kids hold up fine with a move, they suffer a certain amount of lasting psychological damage when their parents live under a mountain of debt and stress for years on end.
I wish him luck.
I went through a divorce at about the same time as the foreclosure, and our marriage suffered from the effects of 'too little income chasing too much debt.' After everything was settled, the liberation I felt from setting aside a $200,000 debt was one of the best feelings I've experienced in my life. My children adjusted better to moving than I expected--in fact, one of my daughters said it was nice that we could 'do some fun things now' because there wasn't a house payment to burden us.
Looking back, I recall how much stress I telegraphed to my children while we were trying to make ends meet. But part of this was handed down from my parents, who thought they were supposed to own a home to provide for the family. I recall many occasions when my father told my mother that he wasn't home when bill collectors called. Most of the time, it was the mortgage company.
The "American Dream" was just the opposite for me: My children seem to be well-adjusted to apartment living--and I'm glad that the aftermath of the housing bubble has inspired some to step away. A bold step, to be sure, but a transformative one.