Foreclosure and the So Called Strategic Default

Half million dollar house in Salinas, Californ...

According to a news article posted in February of 2012 on a CNN website, “Five years after the housing bubble burst, America’s wealthiest families are now losing their homes to foreclosure at a faster rate than the rest of the country, and many of them are doing so voluntarily. Out of all foreclosure activity, the share of foreclosures on properties valued at $1 million or more has risen by 115% since 2007 while the share of homes valued at more than $2 million jumped by 273%. Meanwhile, the share that foreclosure on mid-range properties valued between $500,000 and $1 million fell by 21%.”

By the same CNN news source, the voluntary losing of the homes by the wealthy homeowners to foreclosure is called a “strategic default.” Even though most of these wealthy homeowners can still afford monthly mortgage payments on the homes in question, they are still deciding to walk away from them because they owe much more than the property is currently worth.

One real estate expert commented on the strategic default by saying, “In million-dollar homes, you’re looking at people who can afford it, but they have to make a business decision: Does it make sense to make payments on a mortgage when the home is worth less than they owe?”

In 2006, bankruptcy filings began a slight rise in number of bankruptcies filed, Then at the official beginning of the Great Recession in 2008, a dramatic rise in bankruptcies occurred that lasted until 2010. During 2010, over 1.5 million Americans filed for bankruptcy protection. In 2011, bankruptcy filings began to slightly decline in numbers and are currently still decreasing.

The Foreclosure crisis during the recession was given credit by many economy experts as one of the causes for the increase in bankruptcy filings. As foreclosure increased during the crisis, the homeowners of the lower end of the housing market struggled to make their mortgage payments, and many had to file for bankruptcy protection to either stave off the foreclosure process to save their homes or keep the creditors at bay until they could get back control of their finances.

During the time of increase in bankruptcy filings, I can remember when a few people on bankruptcy blogging sites, whom obviously had means, called bankruptcy filers sluggards, welshers and a variety of other demeaning names. Many of these concerned citizens shared those who filed bankruptcy should go to work, pay their debts and quit being a burden on society, as if they had a choice in the matter.

Now that the shoe is on the other foot, so to speak, it is possible some of the same people who blogged against the destitute forced to file bankruptcy are the ones now making strategic defaults, simply a business decision to alleviate a bad financial situation.

Similar to the poorer homeowners who were forced to give up their homes to foreclosure during a bankruptcy, many of the wealthy homeowners, practicing strategic default, get to live in their homes “rent free” until the home forecloses. They can stash saved mortgage money into their savings accounts until they are forced to move. The only difference between the wealthy getting to keep their mortgage money and the homeowners forced to file bankruptcy getting to keep theirs is poorer citizens use their mortgage savings to pay their bankruptcy attorneys.

I wonder why the well to do cannot seem to understand that filing for bankruptcy protection is a business decision to overcome a bad financial situation just like a strategic default is for the wealthy. Neither is against the law, but in the opinion of this writer, it is the self made wealthy who chastises the down and out that might be a greater burden on society.

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