Strategic Foreclosure

Strategic foreclosure has become a HOT topic as of late. With property tax assessments coming out (forcing homeowners to see the neighborhood values), property values still dropping in some areas (3 years before we see any bottom in my opinion), interest rates under 4.5% (WOW!), and aggressively priced, rehabbed foreclosures looking good (Fannie Mae is setting the trend) it makes a homeowner wonder, "Should I just let my home foreclose instead of dumping payments into a black hole?"

The reality is that some of us (yes I'm in that group too!) may NEVER see our current loan balances match our property values in the next 7-10 years. Those who purchased in 2006-2007 with 100% financing have the extra pain of buying at the peak of the market so they are even more upside down. Once you get over the anger of the values dropping, get through the anguish of thinking of 'wasting' money on a depreciating asset, and get a grip on what you need to do next, you need to figure out what you want to do and what you are able to do. Let's look at some popular options:

1. Allow the home to foreclose and down-size to rental for 5-7 years.
2. File a bankruptcy including the home and purchase another home in 2 years.
3. Buy a new property and let the old property foreclose.

Any route you go, you need to know what it takes to cover yourself from any deficiency judgements from your current lender. Also, if you plan to buy again, to know exactly what you need to do following the foreclosure. I've always felt that you should look at it as a business would look at an asset and take all of the emotions out of play. Here is the best synopsis I found about strategic foreclosure:

"Society has put a stigma on foreclosure. If you foreclose on your house, that means you are a deadbeat loser who won't pay their bills. Society has turned what is in essence a business and financial decision into a black mark against the character of the person themselves. It is important to understand that having a foreclosure is not an indication of your character as a person. Life can happen. Medical bills and emergencies arise. Step back from the emotional aspect and look at the situation from a business perspective. No one wants to foreclose on their house. Sometimes, it is unavoidable." (link to full article)