Homeowners who owe more on their mortgage than the actual house value are considered “underwater” or “upside down.” The number of Americans in this situation is ever increasing: Today, at least one in five homeowners owes more than their home is worth.

The action these homeowners are considering taking is just walking away from their obligation, what is known as a strategic foreclosure.

Brent White, an associate professor of law at the University of Arizona, recently published a paper titled Underwater and Not walking Away: Shame, Fear and the Social Management of the Housing Crisis. Although not meant as a blueprint for homeowners, White points out the moral dilemma and fear most homeowners feel in not meeting their financial responsibility to their mortgage servicer. Along with that fear - which White says is “cultivated by banks … and the government” - is what appears to be a double standard.

Lenders and other businesses carry no such moral struggle, says White, and often walk away from their financial obligations under the guise of it being a wise business decision. Case in point: Just weeks ago in New York City, two companies that had purchased Stuyvesant Town development back in 2006 defaulted on their loan and turned over control of the property to its creditors. They just walked away. It is considered the second-largest default in the history of commercial real estate.

White contends walking away can be in a homeowner’s best long-term interest. If a home is more than 20 percent underwater, he says, it might make more business sense to walk away. A homeowner who’s making a $3,000-a-month mortgage payment could quite possibly rent in the same area for $1,000 a month.

It does give one pause to consider. There are however, drawbacks.

A homeowner who strategically defaults can face stiff consequences:

• Their credit rating takes a huge hit, one that may take anywhere from 7 to 10 years to recover.
• Due to the poor credit rating, securing a loan of any kind is near impossible.
• They could also be held liable for the difference between the actual mortgage and the purchase price when the loan servicer sells the property. Known as a “judgment deficiency,” lenders can seek payment at a later time for years to come.

Some states are non-recourse states, meaning borrowers are not held liable for the deficient amount the lender will not get back from the mortgage balance. You can find a list of these states here.

If you are considering a strategic foreclosure, it is best to consult an attorney or accountant who has experience in these matters and is familiar with your state’s laws.

TALK BACK: Would you ever consider a strategic foreclosure? Do you know anyone who has? Post your comments below.

Posted by Sharon Walker

Tags: strategic foreclosure

This entry was posted on Wednesday, March 3rd, 2010 at 6:00 am and is filed under Mortgage Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.