The ‘Free Rent’ Approach: When Homeowners Just Stop Paying their Mortgages

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Strategic mortgage default has “really been a blessing,” says one Florida man, who stopped making payments last summer. His mother, who lives a few blocks away, has been in default since the spring of 2008, and says, “the longer I’m in foreclosure, the better.” They both pay a lawyer not to actually help them keep their homes in the long run (who cares about that?), but simply to stall the proceedings and buy them more time to stay in their houses—rent- and also mortgage-free.

So exactly what happens you stop paying the mortgage? Nothing. At least for a while. And “a while” seems to be getting longer and longer according to the NY Times, which states that foreclosure proceedings have been initiated against 1.7 million homeowners, but that:

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics…

In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high…

The Times story features Alex Pemberton and his mom, Wendy Pemberton, who both live in St. Petersberg, Fla., and who both pay an attorney $1,500 who says he does “as much as needs to be done to force the bank to prove its case.”

That $1,500 these homeowners are paying in lawyers fees is considerably less than what they’d pay to keep up with the mortgages. So they pay the lawyer and justify their defaults by saying that this is simply business. And nowadays, homeowners finally seem more apt to approach homeownership in a cold, even ruthless business manner. As the Times writes:

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

Most homeowners aren’t as angry as this guy, who bulldozed his home before the bank could take possession of it. But they do feel like: Hey, why in the world should I kill myself to keep up with the payments? Why not milk the system for as long as I can? That’s how the banks, Wall Street, and, more recently, tons of my neighbors, are doing it. What about me?

More than five million homeowners are underwater, owing more on their mortgages than the homes are worth. No one knows how many of them will “walk away,” as the phrase goes—a phrase that doesn’t seem appropriate anymore, because strategic defaulters aren’t walking anywhere really. Instead, they’re staying put, squatting and lawyering up until somebody forces them out.

But what about the consequences, what with damaged credit scores and lenders coming after debts years after the fact? What about the future? Here’s how one man in the Times story deals:

For borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

The natural question then is: Why did you agree to buy a house that required you to pay $2,500 a month in the first place?

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