Miami-based attorney Douglass Lodmell says legal help is important so clients don't inadvertently give up any rights during the foreclosure process or get socked with a deficiency judgment that requires them to repay the defaulted amount later on. Before they get to the point where they stop paying the mortgage, clients with substantial assets other than their distressed home should also look into establishing protective trusts so that creditors "can't just go in and grab them," he says.
PAST THE PEAK
Although headlines predicted a tsunami of strategic defaults once housing prices began to fall, so far it hasn't come to pass. Defining a strategic defaulter as someone who doesn't pay the mortgage but does pay other non-housing debt, credit bureau Experian and consulting firm Oliver Wyman figured that strategic defaults peaked at about one in five foreclosures at the end of 2008. But such numbers are squishy because it's impossible to know from the data whether someone can't or just won't pay debts. After all, even when a financial situation seems desperate, there may be other ways to raise funds, such as borrowing money from a friend or relative, raiding the kids' college funds or taking a second job.
Borrowers are more likely to make the effort to keep paying if the amounts owed are relatively small; if they've amassed a large amount of equity in the home; or they expect the housing market to perk up soon, according to Michael Seiler, founder and director of the Institute for Behavioral and Experimental Real Estate at Old Dominion University in Norfolk, Va. They're also highly influenced by what their peers do.
Seiler says that while most people denounce defaulters because it violates their deep-seated beliefs that we all should pay our bills, in a few cases the group-think works the other way. One woman he interviewed for his research said she had been paying the mortgage faithfully on her Florida home, even though her community's home values had tumbled over the last few years. Yet many of her neighbors - who had defaulted - kept constant pressure on her to reverse her choice. "They talked to her as if she was an idiot to keep paying," he says.
Lodmell contends that letting go of an underwater home allows the market to establish true prices and converts a bad "speculation-prone" loan into a good long-term asset. "It's morally just to strategically default," he declares.
But such attitudes are troubling to Seiler, who says strategic defaults create broader problems for society. He says it's up to "mavens" like financial planners to guide their clients so that the interests of society, as well as individuals, are protected. "They can help cure the disease," he says.
June Fletcher is the author of House Poor and writes the weekly online House Talk column for The Wall Street Journal.