Strategic Default Scare Tactics Aimed at Baby Boomers
Strategic defaults by Baby Boomers and others are picking up steam. To counter this growing trend, lenders and agencies like Fannie Mae, FHA, Freddie Mac and credit reporting firms are issuing stern warnings that those who walk away from their homes will be punished and hounded for years. Here's the latest dire warning:
'Strategic Defaults' Can Damage Credit for Years
Home owners who choose to default on their mortgage even though they can afford the monthly payments can expect to take a significant hit to their creditworthiness, some credit rating firms say.
A record of the default — initially as much as 200 points — stays on a credit report for seven years. This will have an impact on the defaulter’s ability to get credit of all kinds and potentially his or her ability to buy insurance and even get a job.
The debt that foreclosure erases may be considered income, and Uncle Sam may want to collect taxes.
"It's by no means a move to be undertaken lightly," says Maxine Sweet, vice president of public education for Experian.
Source: ARA Content (07/30/2010)
Mind you, these rules do not apply to banks and lending institutions whose greed caused the financial meltdown and gobbled up our tax dollars in the bail-outs. Nope, they default on real estate deals that have gone bad all the time! Yet, when a Baby Boomer with an upside-down mortgage is faced with throwing what's left of his hard-hit retirement savings down a black hole decides to walk away, he is labeled a scoundrel by these same institutions.
For those who walk away from a mortgage because of a hardship or to salvage what's left of their retirement savings after trying - but failing - to work something out with the lender, just realize that you are dealing with lenders, corporations and agencies that lack moral ethics and rejoice in nothing but their own greed. And you would be surprised to learn that the majority of Americans, including most real estate agents, agree with this assessment.
The Reality of Strategic Defaults
But yes, there are consequences to walking away from your home. The lender can come after you for collection of unpaid loan(s) unless you live in a non-recourse state...and even then you are only protected against the first lender by a foreclosure. If you have a second loan on the property, the lender can turn over the balance to a collection agency. And the IRS may come after you for mortgage relief. Plus your credit report is dinged for a long, long time and agencies like Fannie Mae will not approve another home loan for seven years.
Rather than a strategic default, it is better to do a short sale if possible. Your credit report is still going to be dinged because you likely have to stop making mortgage payments to qualify for a short sale. You also have to prove some type of hardship, but that should not be difficult for Baby Boomers who have lost jobs or are entering retirement. And Fannie Mae will allow you to get another home loan after only two years, which also provides time to repair your credit score.
The thing to really watch out for in short sales is that the lender(s) agree in writing not to seek a deficiency judgement for any unpaid balances. Otherwise, you may be surprised when you start receiving frequent calls from collection agencies.
These are difficult times for older Baby Boomers. If you have lost a job, you know that no one is likely to hire someone who is in their fifties or early sixties. if you consequently find yourself in financial difficulty, be smart about how you handle the situation. Should you find you can't keep up with your home payments or if it doesn't make sense to keep throwing money at a hopelessly under water mortgage, get professional advice before taking any action.
Know your alternatives. Understand also that lenders do not typically care about your well-being - they are guided by profit motives, entrenched policies and in some cases, fear. So always put your own survival and your family first! Do what you have to, but don't be impulsive. Carefully derive a strategy that works best for you and then implement it.
The economy is not likely to get well soon. It could get worse. And Boomers who are financially shaky at this point should examine their options. Contact us at www.BabyBoomerlifeboat.com if you have real estate questions. We offer a free service to Boomers and may be able to provide useful advice or point you in the right direction. Just don't give up hope - there are always options.