"Not Paying the Mortgage, and Not Even Worrying." That's a recent headline describing the approach of some underwater homeowners to their mortgage problems.
An increasing number of borrowers who can afford their monthly payments have been opting to "strategically default" on their mortgage debt because the mortgage far exceeds what the home is worth. A recent report indicates that around 12 percent of all mortgage defaults fall into the "strategic" category. It's even suggested that this attempted escape from mortgage debt is becoming socially acceptable.
For desperate homeowners convinced they are going to lose their home eventually no matter what they do, it may seem to make sense. It's reported that the average borrower can be in foreclosure for 438 days before actually being evicted, up from 251 days two years ago. For the financially strapped, living mortgage-free and rent-free temporarily may seem like a sensible way out regardless of longer term consequences.
But strategic default is not a smart way out for most owners who either can afford to make their mortgage payments or who can work out a reduced payment plan with their lender.As we've pointed out before, if a lender forecloses on a home in New Jersey and sells it for a price that's insufficient to cover the unpaid balance owed on the mortgage, New Jersey law permits the lender to pursue the owner for the unpaid balance. The lender can get a "deficiency judgment" against the borrower that can haunt the borrower for years.
So in New Jersey, default is not an escape, at least for those who have, or expect to have, income or assets that a creditor can reach. And even for those who don't, a foreclosure does not help a credit score -- the record of a foreclosure can remain on a credit report for seven years.
And now there is an additional disincentive for strategic defaulters.
Fannie Mae, which owns or guarantees millions of mortgages, has become sufficiently alarmed about the rise of strategic defaults to step in. It recently said it would "lock out" borrowers from getting a new Fannie Mae mortgage for seven years if they default on a loan they can afford to pay.
"Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting." So said Terence Edwards, a vice-president of Fannie Mae. Fannie, of course, is fearful of a new wave of losses that could follow from defaults by borrowers who can afford to pay. Fannie also said it plans to step up legal actions to pursue deficiency judgments in states like New Jersey that permit lenders to go after borrowers' other assets.
The new seven-year waiting period will apply to borrowers who cannot show extenuating circumstances causing the default or show that they tried with their lender to get a mortgage modification. Those who can show genuine hardship or an attempt to do a workout with the lender may only have to wait three years.
With these disincentives to strategic defaults, it's obviously worthwhile to try to work with the lender to arrange a mortgage modification that will reduce mortgage payments to an affordable level.
And even if a modification can't be arranged, there are other alternatives to strategic default.
As we've noted before, lenders will sometimes agree that if the borrower voluntarily hands over the deed to the home, the unpaid balance of the mortgage debt will be forgiven. With this "deed in lieu of foreclosure" arrangement the lender usually will agree not to seek a deficiency judgment against the borrower. Or sometimes the lender will agree to a "short sale" in which the unpaid balance of the borrower's mortgage is forgiven if the homeowner turns all the proceeds of the sale over to the lender. This also can get the borrower off the hook for a deficiency judgment.
In New Jersey, "Not Paying the Mortgage, and Not Even Worrying" is the wrong approach.