Strategic Foreclosure: Was It a Smart Move?

The old saying that home prices never fall obviously wasn't true. But in the following video, Fool contributor Matt Thalman discusses why the "strategic foreclosure" may not have been the smartest thing to do for the millions of homeowners who could afford their monthly mortgage payments but decided to walk away from their homes just because they owed more than the homes were worth.

Matt turns this idea toward the stock market and explains why it's not good for investors to walk away from their losers simply because the share price has fallen below the amount they initially paid for the stock. Just because we lose paper profits in the short term, Matt says, doesn't mean we should give up on our long-term investments if the companies are still performing. If we did, we'd all end up living in the poorhouse.

Check out the video for more details.

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  • Report this Comment On June 15, 2013, at 8:37 AM, vix1830 wrote:

    OMG!

    1. Just who is going to re-fi a house with an LTV of 150% Matt?

    2. Thee credit rating companies are already adjusting their algorithms to reflect the other account behaviors which has resulted in rising scores for people who were strategic defaulters, and kept all their other accounts current. "Their credit is hardly trashed at all and infact most banks will give a mortgage to these people now after 3 short years.

    3. The long term interest costs and the negative equity you walked from at 7% over 30 years is HUGE. a $100k mortgage is $140k in interest is about so amortize $240k in lost opportunity. If you strategically defaulted on a house you purchased in 2006 in 2007 or 2008 you are very much better off now and your credit is almost repaired if you did everything else right.

    4. Real estate losses are not offset against capital gains like stock so comparing these two asset classes is complete nonsense.

    5. Opportunity costs in the market can be huge regardless of asset class. And residential real estate should never have been touted as an "investment" to begin with. Continuing to refer to it vs other classes of assets is reckless at best.

    6. Selling your losers and riding the winners works a lot better than carrying losers. See opportunity cost above. Setting tight limits and "strategically redeploying is a lot smarter than hanging in there like Matt suggests. If it's not going up in this Market it's in bad shape.

  • Report this Comment On June 15, 2013, at 12:34 PM, XMFMT wrote:

    To fooltinytools, thanks for your input, but as do disagree with a number of your points.

    First, if you have a FHA Loan, you can re-fi even if you're underwater on the property, especially if you haven’t missed any payments, which someone who could afford the home would be in good standing.

    Second, even if the credit companies are changing the way they score a strategic defaulter as you say, you would still have a foreclosure on your credit report, and that should raise some red flags for a new lender, well at least if they were a responsible lender and especially if they were the ones carrying the risk and not selling your loan to someone else.

    Ok, the 7% is what you would have put towards the home with the down payment and the few years of payments. What would you have paid if you had just rented the whole time? Perhaps 3% to 4%, so yes you have now thrown away 3%, not a big deal. But if and when you decide to once again purchase a new home your starting from the beginning. Takes you a few years to get back to that 7%, and while prices haven't yet recovered to pre-recession highs, they eventually will and if you don’t buy before that time, then what did you save?

    No, you are right, real estate loses aren't able to offset capital gains so when you sell a losing stock you can write it off, when you walk away from a house and take a $10,000 hit, you don’t get to deduct anything on your taxes. But I'm confused as to what your point with that comment was? What assets classes would you compare to a house? To the stock market?

    The idea that a home is an investment is true, but the way most American's view an investment is where things go wrong. An investment is not buying a home today and selling it in 6 months or 1 or 2 years, that’s a flip. An investment is not buying a stock today, just to sell it for more tomorrow, that’s day trading. An investment is something you put money into, plan to own for a long time (10, 20, 30 years, if you don’t want to own a home for that long then you shouldn’t buy one, just like if you can't keep money in the stock market for at least 5 years, you shouldn’t put it in) as it grows in value. A home meets those terms as an investment, similar to stocks. With a home after 15 or 30 years the asset fully belongs to the investor. A home is an investment, especially when we look at the alternative or as you mentioned the opportunity cost, you only have one other option which is renting, and after 15 or 30 years the renter doesn’t own anything. Lastly, with any investment, there is no guarantee that the value will go higher in the short term or long term, but that’s part of investing, taking a calculated risk.

    If you have a real loser stock, you should sell and walk way, but similar to strategic foreclosures, we saw millions of American's walk away from the stock market after the 2007-2008 crash, and they weren't walking away from losers, but companies which had good fundamentals and people just got scared. Had they held onto those losers at that time, they would be better off today. The market is higher today than it was in 2007 when it peaked.

    My point with the house was the same thing. If those people would have stayed in their homes and continued to pay their monthly payment, while their home may still not be worth today what it once was, in a few years it will be again. And they would have been better off staying put, not walking away from a loser just because it was a loser.

  • Report this Comment On June 15, 2013, at 4:32 PM, idahorealestate wrote:

    I am a real estate agent in a vacation town in Idaho, our market rose so high so fast when the crash happened values dropped by 75% on homes in 2 years!

    Matt makes a big mistake thinking you can refi in a couple of years with the lower interest rate. The bank will apprise the property and if you are underwater forget getting a refi. No way no how, the goverment programs that were promised were for people who were 30% or less underwater.

    So do agree that in stocks you wait for the prices to come back, because most of us paid cash for the investements. ( Unless you are one of the to big to fail banks)

    I disagree that you can not compare houses that you borrow money on to investments. Sorry Matt

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