Tendency to Walk Away from Underwater Mortgages Facing Foreclosure has Increased
Posted on November 19th, 2009 in Foreclosure | No Comments »

The tendency to walk away from underwater mortgages facing foreclosure has increased. In underwater mortgages the value of the house has dropped below the worth of the loan.
One of the many who lost her job recently is Sharon Sakson. She used up her savings to run along with her monthly mortgage dues of $2,400 on her house But she soon saw the foolishness of continuing as her property was worth thousands of dollars less than the loan it carried.
When she refinanced in 2006 the house had been valued at $390,000 but today it is below $320,000 that she paid initially to purchase it in 2004. This prompted Sakson take the decision similar to what many others are doing – she stopped her payments and sat back allowing the bank to do whatever it wanted to do. She decided to walk away.
This move is called strategic default or voluntary foreclosure. It is fast challenging the efforts of the government to keep troubled borrowers in their homes. It is serious to walk away from a mortgage as it can erase 100 points from the person’s credit score. One becomes unqualified for a new mortgage for as long as 7 years.
Despite the gravity of taking such a move this is exactly what borrowers are doing. 588,000 borrowers took a walk from their homes in 2008 noted Oliver Wyman of Experian. Home prices are inching forward but it is insignificant compared to the fall it has endured since 2005.
Millions more are being thrown into the situation Sakson suffered. There is little chance of rebuilding of equity. If this walking away continues the housing recovery will become a remote hope. It will prompt lenders to further tighten credit and impact negatively on the entire economy.
Mark Zandy of Moody’s Economy.com said “It’s increasingly a more important factor driving the foreclosure crisis. As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determin it doesn’t make financial sense to hold on to their homes. That’s going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time.”
Sanjib Das the CEO of CitiMortgage observed that one out of every five borrows are defaulting intentionally. He said, “It’s a very large number, and it’s a very, very significant risk to the housing recovery.”
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