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Strategic Default on Underwater Mortgage Can Be Viable Choice in Some Cases

The downturn in the housing market has called a lot of conventional wisdom into question. For example, the commonly accepted thinking used to be that a homeowner should strive to avoid defaulting on a mortgage wherever possible.

These days, however, that decision is not so clear. Indeed, a new research study suggests that people who choose to default on mortgages they could afford to pay often have better credit scores than others who default.

The study was conducted by FICO, the firm that initiated the well-known credit score that is still widely known by the FICO name. The firm examined data from credit bureaus to build a profile of people who decide upon "strategic default" when three criteria are present:

•· The home is worth less than the homeowners owe on it.

•· The homeowners are over 90 days delinquent in payments on the home loan.

•· The homeowners are current on their other credit arrangements.

The study contained some interesting findings about homeowners who fit this profile and choose to default on the home loan, even though they could afford to continuing paying on it. Those who choose strategic default tend to have higher credit scores and a stronger credit history than others who default on their mortgages.

Those who choose strategic default are "getting their life in order," said Andrew Jennings of FICO, analyzing the research study findings.

The FICO study did not determine how many strategic defaults have occurred. But researchers at the University of Chicago have estimated that the percentage of defaults that are strategic defaults rose from 26 percent in March 2009 to 35 percent in September 2010.

With as many as 1 in 4 homeowners with a mortgage underwater, the question of strategic default is likely to continue for some time to come. It is, of course, not a decision to make lightly. Even if the house goes through foreclosure, there is still the possibility that the lender will pursue a deficiency judgment at a later date. Talk with an experienced Minneapolis area real estate attorney at our firm about your options.

Source: Study: "Underwater homeowners who walk are credit savvy," USA Today, 4-25-11

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