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Strategic Mortgage Defaults on the Rise

Strategic Mortgage Defaults on the Rise

As the Great Recession deepens, all around the United States

, many real estate owners who are able to make their monthly mortgage payments are choosing not to. Instead, they are just walking away from their real estate and allowing their mortgage note holders to foreclose on their properties. Real estate owners who choose to do this are engaging in what is referred to as a "strategic mortgage default".

There can be many reasons for doing a strategic mortgage default. The primary reason is that the real estate with a mortgage against it has a fair market value significantly below the principle balance that the real estate owner is paying a mortgage on. By doing a strategic mortgage default, the real estate owner is able to get out from under debt service on a real estate asset that they may not realize a positive return on, at least not in the short term.

Of course, there are ethical concerns raised by the practice of strategic mortgage defaults. Losses are still realized upon the sale of the real estate, just not by the individual who bought the real estate in the first place. And in cases where mortgage loans are backed by Freddie Mac and Fannie Mae, the ultimate looser is the United States tax payer.

To make matters much worse, an entire assortment of "complex investment vehicles" such as "mortgage backed securities", "credit default swaps", "collateralized debt obligations", and other such "derivatives" have been created on Wall Street based upon the real estate mortgage industry. As real estate in the United States increased in value, Wall Street investment banks enjoyed exponential profits on these derivatives. And when the United States real estate market crashed, Wall Street investment banks suffered exponential losses. Or at least they would have, were it not for the bailouts of those considered to big to fail. Instead, the United States tax payer looses again, in spades!

Therefore, when someone engages in strategic mortgage default, while they may think that they are improving their own immediate financial situation; they are also harming their neighbors, friends, family, and the United States of America as a whole. Hence the ethical dilemma; which millions are apparently not very worried about. Fox News recently reported that strategic mortgage defaults account for about 20% of all foreclosures in the United States at this time.

As a result, the Federal Government is considering cracking down on strategic mortgage defaulters by locking them out of any government backed real estate mortgage product for a period of seven years.

Strategic mortgage default rates vary from state to state. States which have seen the greatest decline in real estate values, and which do not allow lenders to pursue borrowers for principal balances owed in excess of the foreclosed real estate sale price, have the greatest incidence of strategic mortgage defaults. Among these states are California, Nevada, Arizona, and Florida.

In these states, and across all of America, the words "I promise to pay..." on the mortgage contract may increasingly not be worth the paper it is printed on. And 2010 may still be the year of the strategic mortgage default with more economic troubles in years ahead as a result.

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Strategic Mortgage Defaults on the Rise

By: Bret Wier
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