10/18/2017

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Intentional Default

A phenomenon that is taking place in today's real estate market is the intentional default on home loans.

Some homeowners are walking away from their mortgage obligations because their property values have declined to the point that the loan amounts are much more than their homes are actually worth. In the real estate market, this is called "being underwater" and many people feel that they are drowning in mortgage debt and don't see any reason to continue to paying for it if the market continues to sink and there is no signs that values will rise any time soon.

Many of those who are refusing to make their mortgage payments are not in crisis but are not making their monthly payments simply because they have made a strategic plan not to do so. Their thinking is that they are losing money because the property value is not there. Why make payments on a $450,000 mortgage when the property is only $300,000 and the value is still dropping?

In a sense, this is a legitimate concern and it may seem like a reasonable plan. But there are some real reasons for serious concern throughout the real estate industry, not just for those who are intentionally defaulting, but for other homeowners as well.

First of all, as a defaulter, your credit is going to be harmed in a significant way for many years to come. If you stop making your payments, your FICO score will drop substantially and it will be difficult for you to qualify for another home for, in most cases, up to at least ten years because that is how long the late payments and the default will stay on your credit report. Why would another lender give you a loan when it is obvious that you walked away from your current obligations?

Secondly, by intentionally defaulting on your property, it drags down the values of other properties in your neighborhood causing undue hardship for other property owners who are trying to ride out the housing crisis. Intentional defaults hurt everyone concerned and it makes it hard for the real estate industry and the overall economy to rebound.

Thirdly, it would be better to make your payments and try to refinance at today's low interest rates which could substantially drop your mortgage payments. It may be possible to get a remodification of your mortgage and in some cases, get your loan amount reduced.

Most people who are intentionally defaulting on their mortgage obligations are not looking at long term realities. Property values are going to rebound. They always do. It may take a while but all we have is time.

The key to making it through the current real estate crisis is patience. True enough, many people are underwater on their mortgages and many are in foreclosure. But in reality, there are more people hanging on than those who are letting go, and when the economy rebounds, those who are hanging on will survive and prosper in the long run.

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