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Question:


I have an underwater mortgage. *Heavy sigh* A friend suggested that I strategically default. What’s your take?
-Confused+Conflicted


Answer:


Distressed homeowners can face a Catch 22: They don’t want to lose their largest, most important asset, so when juggling their finances they assign the highest priority to making their mortgage payment and staying current. If they’re successful, though, their lender, which is getting every penny that it’s owed, has no incentive to ease their burden by refinancing or approving a modification or a short sale, in which a property is sold for less than the outstanding debt on it.
 
The understandable frustration that homeowners might feel might persuade them to start skipping payments to concentrate the minds of the bankers who are otherwise doing nothing to accommodate them. It’s like that old observation that when you owe your bank $1,000 and can’t pay it, it’s your problem, but when you owe your bank $1 million and can’t pay it, it’s the bank’s problem. It’s tempting to make it the bank’s problem when you owe somewhat less than that.
 
Skipping payments may be a bad idea, however, for several reasons. Your lender may feel some pressure from the reduced income, but whoever handles your loan could respond in ways that are unpredictable and very unpleasant for you. Whatever action is taken, your debt will increase, and probably not just by the amount of the missed payments. Your lender is likely to start adding fees and penalties. You could always up the ante and dare the bank to foreclose, but depending on where you live, the terms of your mortgage and how much money is involved, the bank still may sue you for the difference between what the home sells for and the amount you owe.
 
Bankruptcy could be an option if you really want to take the gloves off, but that will make it very difficult to obtain credit for the better part of a decade, and it could hurt your employment prospects, as bosses tend to do credit checks these days on job candidates. Before skipping payments, you have to ask yourself whether you have the temperament and the skills to play high-stakes poker with someone who has far more chips on the table, more experience at the game and an icy, detached resolve.
-Conrad de Aenlle



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