Bankruptcy: Strategic Default

The housing crisis has affected almost everyone. Homeowners have seen the values of their homes drop dramatically leading some to question whether continuing to pay their underwater mortgage is smart. I think in some situations, walking away from a home that you can’t afford is the best choice. However, banks and the government are making an effort to define some of these homeowners as ‘strategic defaulters’ who would not be eligible for government loans in the future.
Section 25 of H.R. Bill 5072 aims to keep ‘strategic defaulters’ from acquiring government-backed loans. While not law yet, this is a sign of what may come.
When some homeowners make the choice to stop paying, they are able to save the money which was going toward their mortgage for the costs of relocating, paying bills, or purchasing other necessities like groceries. There is generally a lag anywhere from 3 to 6 months (and sometimes longer) between when a homeowner stops paying the mortgage and when the bank can foreclose on their property. They can live in their home rent free.
When faced with this situation, applying for a loan modification ( could help define someone as a ‘distressed homeowner’ instead of a ‘strategic defaulter.’ Many of my clients come away from the modification process very frustrated. However, pursuing a loan modification could show a good faith effort by the homeowner even if a modification is never actually achieved. In the future, it may be an important distinction.
And who knows? Maybe the bank will offer terms which could help solve the problem. Either way, the homeowner is doing their part.