Did you see CBS’s 60 Minutes last night?  They did a piece on “Strategic Defaults”.  Here is the 12 minute news piece in case you missed it (my thoughts on this below):

Watch CBS News Videos Online

So what are the perils of strategic defaults from the investor’s perspective?

First, you should NEVER suggest to your prospects to stop making payments.  EVER.  Of course, once someone decides to no longer make mortgage payments, and they are already late, then by all means I would engage them about a short sale.

Second, I would strongly encourage you to educate people who are considering just “walking away” on the numerous advantages of a short sale over this strategy.  I actually wrote a blog post about this about a year ago, that you can read here.

Third, you need to be aware of the potential allegations of fraud when working with a strategic default.  Freddie Mac recently came out with an article titled “A Perspective On Strategic Defaults”.  This goes back to point #1, which is you should NEVER be telling a homeowner to default on their mortgage.  My friend and colleague Ron Ballard also has come great insight on this topic on his blog.  And my friends at Old School Title have suggested that investors should start asking for a copy of a homeowner’s credit report to ensure that they short sale they are working is not a plan for a strategic default.

In closing, I would think that we are going to start seeing more strategic defaults.  What I do find interesting, however, is the notion of “just walking away”.  To me, this seems silly, to let your home go into foreclosure, instead of finding a short sale buyer.  I understand that some people don’t want the disturbance of potential buyers looking at their property, but this to me seems a small price to pay in exchange for only having a short sale, and not a foreclosure, on your credit report for the next 7 years.

I would love to read your comments below on this very controversial topic.  Please remember to let us know if you’re addressing it coming from the point of view of an investor, a homeowner, or someone else.

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