Many Orlando residents are considering “strategic default” and voluntary foreclosure to fix their “underwater home” problem. Earlier this week I reported on a survey by the National Association of Independent Landlords, showing that most non-corporate landlords are OK with renting to families and individuals who have lost their homes to foreclosure, if it was an isolated event and they showed an otherwise good track record of paying their bills on time. Now, another study confirms that creditors are now beginning to take into account the deepening mortgage foreclosure crisis when assessing the credit worthiness of borrowers. Credit monitor TransUnion reports that those who only default on mortgages are less likely to default later on new car loans or credit cards than are people who default on mortgages and at least one other debt at the same time. This was the result of a study, entitled “Life after Foreclosure,” on 129,000 homeowners followed over a 12 to 17 month period. The study found that credit scores for mortgage-only defaulters bounced back quicker, with credit scores rising a median 8 points 12 to 17 months after defaulting on a mortgage. The results of this study were similar to a study performed by credit monitor FICO, which last month reported that mortgage-only defaulters were savvy about credit, with better credit histories than other mortgage defaulters.
Many Orlando homeowners are concerned about the extreme loss of equity that has produced “underwater homes.” The homeowners who were the subjects of this study fit the profile of those who have engaged in a so-called “strategic default,” which involves voluntarily allowing your home to go into foreclosure. Some homeowners in Orlando, and across the country, have opted for moving out of their homes with “toxic mortgages,” and starting fresh with a clean slate. Such a “strategic default,” or voluntary foreclosure, is a legal maneuver designed to eliminate a mortgage loan that far exceeds the fair market value of the house. Strategic defaulters are not always like homeowners who are having to walk away from mortgages that they can no longer afford due to a financial crisis. A report last year from the Wall Street firm of Morgan Stanley showed that strategic defaulters did not fit the usual profiles of defaulting borrowers – most strategic defaults occur with high balance mortgages (“jumbo mortgages”),and with homeowners with high credit scores.
Many homeowners in Orlando and the Central Florida area are saddled with such “underwater homes,” particularly those that purchased their homes at the peak of the real estate bubble. One year ago this time, the Orlando Sentinel reported that Orlando was number 3 in the nation for the percentage of homes that were worth less than the mortgage debt. Strategic default has serious implications and should be considered very carefully with the advice of an attorney experienced in defending mortgage foreclosure and bankruptcy law. This new study adds to the growing body of data that suggests that damage to credit scores of strategic defaulters may not be a serious as previously thought. This factor must be taken into account with other factors when consulting with a bankruptcy and foreclosure attorney to determine whether strategic default makes sense for a homeowner burdened with an “underwater home.”