Strategic Foreclosures

http://realestate.msn.com/article.aspx?cp-documentid=23390500&GT1=35000

Michelle Burton is ready to trade up. After more than five years of living in a Long Beach, Calif., neighborhood that she thinks is unsafe for her and her two sons, she has stopped making her mortgage payments, started banking the money and is waiting until just before eviction to move.

“I don’t want to stay in the area I’m in,” says the 33-year-old nonprofit development director and single mother. “I could be renting a much better house in a better area for less or equal to what I’m paying now."

k... this is the thing that is pissing me off today. The article discusses a new technique referred to as the "strategic foreclosure." Where people who, because of declining home values become far underwater on their mortgage, so even though they can afford the payments, they stop paying them and allow the bank to foreclose, taking advantage of the glut of foreclosures to spend a year in the bank's house for free while they bank their mortgage payment, their credit slips to the 400's and they move into a rental right before the bank evicts them.

Sure, businesses default on contracts all the time, and to some extent, I think people can walk away from a contract, but the part where they stay in the home for a year while screwing the bank is a morally bankrupt (no pun) position. If they want to walk away from their home, move out and rent, then mail the keys to the bank.

Who in their right mind would do this? A selfish individual with a warped sense of entitlement. I'm sorry your investment didnt work out, that doesnt give you license to screw the bank out of money the bank is legitimately entitled to.

Well said. Completely agree with you.

Unfortunately, it seems that's the world we live in. A bank is a supposedly faceless entity so it doesn't seem so bad. At least not until the next person dreaming of owning a home comes to the bank and is turned down because of previous debtors screwing the bank.

I have been seeing news stories on this more and more. You know at one time that house was the right price in the right neighborhood. Instead of thinking you are underwater now, what about in 5 years the housing market has rebounded the house you gave up is back up in value. It is one thing to lose your house because you lost your job and can no longer afford it. People that just give back the house because it is now underwater in value should be flagged by every mortgage company in the country so they never ever get a mortgage again.

Glad I am not the only one.

I had forgot about the fact that the bank will want to recoup their money from any potential buyer as well. To be honest really, the people in these homes have the banks by the balls... The banks contract is that X dollars are secured by X property. So long as someone can tolerate the idea that their credit will be trashed for 5 years or more, it's making the bank realize the loss while you simply forfeit your inequity. So it makes finincial sense, I think.

We are taking our house off the market, we dont think we will be able to get what we need to upgrade to "the house after the starter house"... So we are taking the house off the market (I might consider a 15 year refi), and then we will save money for a 2-5 years and then we should be in much better shape, both from the aspect of being able to get more for this house and being prepared financially for a substantial down payment.

Paying off the plastic was huge... that was a very major draw against our savings. We have a car that is done in June also, so between that and the cc's, it's almost double our mortgage payment that we will no longer require to pay out... the remaining debts we have are "good" debts... student loans (reimbursed by an employer), and mortgage + equity...

Walking on a mortgage isn't anything new. In the 80's, during the bust years in Houston, it was commonplace. I'm not condoning it, just mentioning this ploy has been around for decades.

I guess it's hard for me to see how this could benefit anyone. No matter what the value of your house is, you need a place to live, and your payment doesn't change based on the value of the house. Unless you already had no intention to live there very long, it should have no effect financially.

And another thing that confuses me is doesn't the bank have legal options here? It's one thing to file a suit against someone who has been out of work for months and has no equity, but this is a case of someone who even admits she has money but decided to stop paying. If I was to make a purchase at Best Buy on credit and didn't make payments on it, I'm prety sure they wouldn't just ask for the item back and be done with it?

Markwes wrote:I guess it's hard for me to see how this could benefit anyone. No matter what the value of your house is, you need a place to live, and your payment doesn't change based on the value of the house. Unless you already had no intention to live there very long, it should have no effect financially.

And another thing that confuses me is doesn't the bank have legal options here? It's one thing to file a suit against someone who has been out of work for months and has no equity, but this is a case of someone who even admits she has money but decided to stop paying. If I was to make a purchase at Best Buy on credit and didn't make payments on it, I'm prety sure they wouldn't just ask for the item back and be done with it?

Kinda... in your best buy example you are getting the item today through an unsecured loan, simply a line of credit and not a loan secured by the asset. In the case of a mortgage, the bank owns it as security on the loan. To a certain extent the banks in these cases are making as bad an investment as you are, just that they are on the hook for the house when you walk away. Add to that the idea that real estate generally increases in value and in these times the opposite Is true you realize how precarious the banks' positions are.

There are some legal avenues being explored by the banks, including suing the former homeowners for the difference between the home's value and remaining principal, but there's a turnip and there is blood.

there is also the issue that even if it forecloses and they get evicted and move away, it will remain their liability if anyone is injured at the house, such as a kid falling out of a tree or getting cut because of broken glass on premisis etc...until the bank eventually actually sells it.