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Is a Strategic Default Simply More Convenient for the Borrower? - 2010-06-20

IS A STRATEGIC DEFAULT SIMPLY MORE CONVENIENT FOR THE BORROWER

In recent weeks, there has been a flurry of media attention to the concept of a "strategic loan default." The question revolves around when it is OK to stop making payments on your home loan, and who gets hurt by your actions.

Some media source reported a growing tendency among "upside-down" borrowers to voluntarily cease making monthly mortgage payments, then continuing to occupy the property as their principal residence, choosing to wait and see what eventually happens.

Apparently, in some states, the foreclosure process is exceedingly slow, sometimes taking the better part of two years to complete. In addition, some states prohibit lenders from seeking financial restitution from borrowers after the house has been foreclosed and taken away from the occupant in what is called an "involuntary alienation."

In Georgia, lenders most often use "non-judicial" foreclosure, meaning that the lender need not go into court to commence the foreclosure process.

Instead, the lender attempts to notify the borrower that foreclosure is imminent, then places a "notice of foreclosure" in the local legal newspaper for four consecutive weeks. After that, the lender's attorney can sell the property on the courthouse steps to the highest cash bidder.

Unlike New York, which has a cumbersome foreclosure procedure, lenders on Georgia homes can often complete the repossession process in as little as six to eight weeks. In addition, Georgia law allows lenders to seek a "deficiency judgement" against the borrower if the auction fails to satisfy the debt. While that process is slightly more involved, it is still a tool lenders can use to protect themselves against those who simply find it more convenient to stop making payments than to make tough financial choices.

I find it interesting to note that, on an investment property, if a borrower stops making payments to a lender, but continues to collect rents until the foreclosure process is complete, he can be charged with criminal fraud. It is a scam technique known as "rent skimming," and is considered a serious crime.

Such is apparently not the case in some states, where legislators have made it more and more difficult for lenders to try to collect what is actually owed. Foreclosure moratoriums, legal challenges, and pressure from the state and federal government has all contributed to making it harder for lenders to get their collateral. What many don't realize is that when a lender loses money on a home mortgage, we all end up paying for it in higher rates and tighter lending requirements.

Please don't misunderstand me - I certainly understand that there are many cases in which borrowers have no alternative other than default.    When the only choice is between food and the mortgage, the choice is clear. But the concept of a "strategic" default seems to me little more than calculated fraud.
 
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