Strategic Foreclosure

Until recently, Foreclosure has always been viewed as a last resort. A heavily stigmatized option that no self respecting person would ever voluntarily face. That has changed. Many distressed homeowners are simply choosing to mail their keys to the lender. In some cases, homeowners are trying to fraudulently buy new homes under the guise of renting their existing ones. Once the new purchase is in place, they choose to foreclose out of the previous loan. Inside the industry, it's known as "ruthless default."

Unfortunately, in today's market, walking away from a bad mortgage may be a prudent financial decision. The places where home prices have suffered the most have many homeowners who are "upside down" in their homes. In other words, they owe more on their mortgage than their house is worth. This routinely happened in the auto finance arena. Now, for the first time ever, it's happening to the American Dream.

The culture of responsible homeowners who belive that financial obligations should always be honored is dead. The new breed of American is choosing to make residential mortgage decisions in line with what commercial real estate has faced for years: American homeowner's are evaluating their circumstances on purely financial terms. This is not necessarily a bad thing over the long haul, but it will definitely bring some associated pain in the near term.

It turns out that the biggest impediment to foreclosure hasn't been "morality" at all - at least not in recent times. Foreclosure damages a homeowner's credit rating and it used to be an almost fatal hurdle to overcome. However, nowadays it is becoming more and more common. Some people have bought houses in as little as two years after their previous foreclosure. Another way to think about that is: if your mortgage blew up in 2006, you could legitimately be looking to buy again at depressed values.

The irony, of course, is that some of these "walkers" are getting a financial windfall. The incentive to walk away has increased thanks to legislation to forgive the tax implications until 2010. Foreclosures are rising: the Mortgage Bankers Association ("MBA") says that roughly one million Americans were in the foreclosure process at the beginning of 2008. That represents an increase of roughly 80 percent year over year.

The statistics also show that the majority of people in foreclosure do not represent any of the common demographics: they are not out of work, they haven't been hit with unforeseen expenses, and they haven't sufferend unexpected medical expenses. In fact, almost 80% of them are healthy and gainfully employed. They are simply choosing to stop paying on their existing house so that they can improve their life.