The family’s decision to allow their house to go into foreclosure isn’t an easy one. But often there is no choice. The loss of a job by one of the spouses can cripple their finances. Even having a significant cutback in salary, such as being dropped from a full-time to part-time employee, can be enough to throw a household budget into a tailspin.
Until the past year or so, a family could rescue themselves by taking an equity line on their house, or even write a credit card check to bolster their checking account and get them through the tough times. But too many Americans have now found themselves cut off from being extended credit through these means. Banks are taking the hard line, even if one’s credit score is still hovering around 800 and payments are always on time.
In 2009, there were over 2.8 million foreclosures filed in the United States. It’s a sad statistic that puts a damper on many families’ American dream of homeownership. Is owning a home and then losing it worse than never having owned one?
But there is one facet of these foreclosures that is particularly upsetting. About one-fourth of last year’s foreclosures were not because the mortgage payments couldn’t be afforded, but instead because families decided the mortgage payment simply wasn’t worth paying. It’s called a strategic default.
Suppose a family owns a home they bought in 2004 for $450,000 with no money down. Their mortgage payment is nearly $3,000 a month, plus PMI and real estate taxes ($500 a month average here in New Jersey). Add in minimal upkeep and necessary repairs and it’s costing about $4,500 a month.
If a family can handle that $4,500 but has nothing left at the end of the month, they begin to wonder if it’s worth the hassle. Especially because the house is now only worth $315,000, using the typical decline of 30% in value in the US. When that family crunches the numbers and compares paying $1,200 to $1,500 a month to rent a similar home, many opt to take that route.
So, despite the fact that their credit will be ruined and the pleasures and comforts of home ownership will disappear, they decide to walk away from their home. They stop making the mortgage payments – which gives them six months or so with no $4,500 payment (saving $27,000) – and prepare for life as a renter.
It’s a sad scenario. But for many, a reality.