Unless you live under a rock, you know that after the housing bubble burst, the number of homes in foreclosure spiked. As more and more homes were being foreclosed upon, news broke about banks “robo-signing” foreclosure documents. As a result of that, banks were required to be more diligent when it came to kicking people out of their homes.
Homeowners began to use strategic defaults on their mortgages. A strategic default is better known as walking away from your mortgage. To do so, you simply stop paying your mortgage and continue to live at the house. Since it takes time for the bank to process all of the paperwork to kick you out, you can stay in your house for many months.
Why A Strategic Default
Ideally, if you are doing this, you are “saving” the money that would otherwise go towards the mortgage payment each month. This is because walking away from your house will drop your credit score significantly. Reports say that on average you can expect your score to drop by about 150 points. You will need that cash to rent a new house or buy a car because no one is going to provide you with a loan. It will also take time to repair your credit as the default will remain on your credit report for seven years.
Strategic Default In Florida
Recently during my travels, I visited Florida which is one of the worst hit areas of the housing bust. The law in Florida is a bit different than other states. In Florida, every foreclosure has to go through the court to be approved. Because of this, homeowners in Florida could stop paying their mortgage and still live in the house for over a year.
More interestingly was a homeowner that I spoke to. He is taking this one step further and I suspect many others are as well. He defaulted on his mortgage and continues to live in the house. Every six to eight months, he makes a mortgage payment. Even though he is still many months behind in payments, he made a payment, which then restarts the cycle all over again. This is akin to credit card debt. If you stop paying your credit card bill, the credit card company will “charge-off” your account and sell it to a debt collector.
Depending on your state’s statute of limitations, once a debt goes unpaid for a number of years, they can no longer legally contact you about it. But if you make a payment, that cycle starts all over again.
For the homeowner I was talking to, he basically restarts the foreclosure process every time he makes a payment. I’m not a legal expert in Florida (or any other state for that matter), but this process seems like it could continue indefinitely. As long as a payment is being made, the bank cannot foreclose.
I am not advocating this technique. On the one hand, I feel as though if you signed the loan document, you should pay according to the terms listed. But on the other hand, I understand some people go through things, like a job loss, and they are unable to pay. I don’t look down on these people for breaking the terms of their agreement. After all, businesses break agreements all of the time.
But I do have a problem with people that knowingly game the system like this person in Florida. Either make the payments or let the house enter foreclosure. Doing so just strings out the inevitable for everyone involved as well as those that are not involved. This family is affected as is the bank. So are the neighbors whose home value declines because the house across the street is in perpetual foreclosure.
Readers, what are your thoughts on playing the system like this?