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Recently, I was shocked to learn about how hundreds or perhaps thousands of Illinois homeowners are using a strategy called “strategic default” to walk away from their current mortgage obligations. Literally thousands of homeowners in Illinois and across the country find themselves “upside down” or “”underwater” regarding the homes they currently live in. The terms “upside down” and “underwater” refer to homeowners who owe more money on their homes than they are currently worth.
It is widely believed the Fannie Mae / Freddie Mac debacle has led to the current economic crisis and deep recession facing America today. However, no one can say Americans are not resourceful and, at times, not in good ways. In the case of “strategic default,” which is also known as voluntary foreclosure, participating homeowners may not be ethical, but they have certainly found a way to beat the system.
In part, this situation is a result of the failure of Fannie Mae and Freddie Mac, quasi-privately owned and government-backed corporations, which insured loans to many homeowners whose income level should not have qualified them for mortgages they could not afford.
Here’s how this “strategic default” strategy works. Those who are having trouble meeting their current mortgage notes, but may not be in default or foreclosure, or are simply seeking lower mortgage payments, go out and purchase new homes. They find homes with lower mortgage payments more commensurate with their income.
On their credit applications and in meetings, new lenders inquire about the status of the current mortgages held by those seeking to get out from under their old mortgage agreements. The perspective lenders take the applicant’s word, in good faith, that their old homes are in the process of being sold. Technically, though this may not be true, new lenders provide mortgages based on inaccurate or misleading information from perspective buyers. Once a new mortgage is secured, the homeowner then simply walks away from their old mortgage obligation, leaving their credit rating in shambles, but at least these individuals or families are now living in a home they can more readily afford.
“It’s amazing concerning what’s happening,” said a licensed Illinois real estate appraiser who requested anonymity. “These people are playing with fire, as they skirt the law regarding the provisions of accurate and honest information they are giving financial institutions. These individuals have good credit ratings at the time and the financial institutions they are negotiating with have no reason to doubt whether the information on the new mortgage applications is accurate and complete. It’s dishonest, yet it is a sign of the times.”
However, a substantial number of those who are participating in this “strategic default” scheme are violating federal law, the government is catching on and some of these people may be in legal jeopardy for lying to new lenders. To exacerbate the problem, the new lenders are not exercising due diligence which led to the meltdown of America’s economy in the first place.
There are actually entrepreneurs who are helping, for a fee, walk people through the process of stepping away from their homes and the promissory notes they signed with their original lenders. This practice brings into question not only legal and fiscal concerns, but a moral issue as well. Some Illinois residents apparently feel justified with breaking a legal contract because of government bank bail-outs and Washington, D.C.’s fiscal irresponsibility which has resulted in our nation’s historic mounting national debt and the financial crisis America is facing. These individuals obviously feel if the government does not have to adhere to a budget, why should they? Of course, two wrongs do not make a right. However, many homeowners look at “strategic default” as a way to provide themselves a personal bail-out, even though it has a devastating impact on their credit rating. What’s good for the goose, is good for the gander–to their way of thinking–and “strategic default” may simply represent a lesson well taught by local, state and federal government.