The Wisdom Of Strategic Default
Wisdom Definition:
Wisdom is a deep understanding of people, things, events or situations that results in the ability to choose, act or inspire others to consistently produce the optimum results through minimal time, energy or thought. It is the ability to optimally (effectively and efficiently) apply perceptions and knowledge in order to produce the desired results. Synonyms include sagacity, discernment, and insight. Wisdom often requires control of one’s emotional reactions (“passions”) so that one’s principles, reason, and knowledge reign in determining one’s actions.
How does this relate to strategic default?
It is not uncommon for us to speak with people who have a very difficult time separating emotion from logic when deciding whether or not to default. What this leads to, more often than not, is empty savings accounts and drained retirement funds. Many of the people who call us after they have burned through whatever money they have left wish they had called us months, if not years, before. Using knowledge and experience when facing a default or foreclosure is the most important thing you can do to minimize the damage that a foreclosure will have on your bank account and, more importantly, your family.
“If you fail to plan, you plan to fail.”
Strategies require making a plan. This is especially true in strategic default. Oftentimes, borrowers believe that they will eventually be approved for a loan modification or short sale and fail to plan for the “what if I don’t?” scenario. This leads to situations such as those I mentioned above: Borrowers being drained financially, strained mentally, and still facing foreclosure. Suze Orman is doing a special tonight on CBS news that discusses strategic default, when it’s okay to strategically default, and the wisdom of strategic default. Orman has been vocal about her view that sometimes it’s best to just walk away if the lender simply won’t work with you.
Orman says it’s time to erase feelings of hopelessness, rethink your ways, and move toward the new American dream.
“The new American dream really is a dream that allows you to sleep at night where you feel secure, and you know what is yours cannot be taken away again, because of the actions of others.”
“Those who do not learn from history are doomed to repeat it.”
I love this quote. It appears that banks and Wall Street have not learned their lessons in regards to reckless lending as they have not been punished for their actions. They continue to make huge profits and have not had to pay for their crimes. There are several revolts going on as I type this over debt, credit, and strategic default. HuffingtonPost.com reported:
“There is a phenomenon happening in the United States of America,” said Orman. “It’s where people are getting seriously angry, so angry at their banks, their credit card companies. They feel like they are not being treated fairly when it comes to the interest rates they are paying. Guess what they’re doing: They are staging a debtors’ revolt. Oh yes, a debtors’ revolt.”
How do you teach someone a lesson? Well, usually people learn lessons as children, like touching a hot pot on the stove or falling out of a tree. This gives them a natural fear that keeps them from being destructive and reckless. Other times people learn lessons from getting hefty fines, speeding tickets, jail time or losing friends who drink and drive. This system tends to work well in our society; however, it does not seem to extend to our financial markets and institutions. These entities sometimes appear to be above the law. They are the large campaign contributors to people in political offices and they have billions in lobbyist money. This is the reason they don’t get punished. So does this mean that they will continue to behave recklessly? Does this mean they will continue to reap profits even if it means financially devastating our economy and people who believe in the system? Absolutely. With that being said, I of course, am an advocate of strategic default when necessary and possibly if enough people do it, it may teach the lenders a lesson. Maybe not?
I think strategic default is a wise decision in many cases. Not all cases, but many cases. Why?
1. No one is getting cheated in a strategic default – Lenders used their own appraisers to value and review the appraisal of properties when they decided to lend money. They also, as a business decision and risk, agreed that the home was adequate collateral to cover the amount that they lent. Mortgages are collateral loans and the homeowner is simply giving the lender the collateral in a strategic default. Neighbors are not being cheated by the defaulter either. They were cheated by false values going up due to reckless lending practices.
2. Life is not fair – It is made up of laws, rules, outcomes and consequences for actions. Wisdom plays into this and when people have the wisdom to recognize a path that leads to a negative outcome, they should avoid it. Many homeowners are on the path of perpetual negative equity and debt slavery that may never end in their lifetime. The only way to escape this is by taking action where they can, within the law of course. For many this is going against the banks by choosing strategic default. This may also go against what we generally believe which is “your word should mean something” or “when you borrow money, you pay it back.” I agree with this in most circumstances; however, there are situations in which this does not or cannot apply. When faced with one of these situations, you have an obligation to do what is in the best interest for you and your family.
3. You have two outcomes – Wisdom is stepping back from emotion and taking a hard look at two trajectories. One is the cost of keeping the home and the other is walking away from it through a strategic default. Where will you be in 10-15 years if you keep paying your mortgage? Where will you be financially? Where will your family be? Stressed? Broke? Broken? Where will you be 10-15 years from now if you strategically (and legally) default? Will you start over? Will you have regrets? Will you be able to rebuild and learn from mistakes? These are serious questions that should be at the forefront of these decisions. This calculator can help homeowners decide if it makes financial sense to strategically default.
As professor Brent T. White says:
“Homeowners should be walking away in droves. Lenders, with the government and media’s help, have shamed and scared these homeowners into holding on — into scraping together to pay their underwater mortgages, even when it means sacrificing their retirement security, not being able to pay or save for their children’s college education, or scrimping on the basic necessities such as clothes and food.”
I ask… Where is the wisdom in that?
