Special Report: Strategic foreclosure- it's legal, but is it ethical?

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GRAND JUNCTION, Colo. (KKCO) -- While some homeowners struggle month after month to make their mortgage payments to avoid facing foreclosure, others are intentionally walking away from their homes. It's called strategic foreclosure, and it's a new trend that has hit the Grand Valley.

A strategic foreclosure involves someone who is capable of making their mortgage payment, but choose not to, usually because their home is not worth the value it used to be.

"They're financially savvy, they understand what's going on with the market, they understand what the financial ramifications are of a foreclosure, and they understand that the long-term benefits outweigh the short-term costs," said Paul Clement, mortgage lender with Guild Mortgage.

The short-term negative ramifications of foreclosure- strategic or not- include a 100-plus credit score drop, but Clement said it can take as little as 12 months for a credit score to return to its pre-foreclosure score. Some may not even worry about their credit score if they no longer plan to finance.

"A lot of times they'll have another home, may have already purchased a smaller home-- called 'buy and bail'-- or they have cash to purchase a home," Clement said. "They downsize considerably and buy a home outright with cash and don't have to worry about financing."

For those who do intend to take out another mortgage in the future, it can take as little as 36 months from originally filing foreclosure to take out a Federal Housing Administration (FHA) loan, or up to seven years for a conventional loan.

Some experts say the biggest advantage of strategically foreclosing is the amount of time it takes from initially stopping payments to when the foreclosure is completed. In that time, which can take up to several years, the homeowners live in their home for free, without making any payments. Meanwhile, the homeowner hoards the money they would be paying for their mortgage payment in order to purchase or rent another home, Clement said.

"If they are $50,000 to $100,000 or more upside down on their house, that gets written off," Clement said.

But, "written off" doesn't mean the loss disappears. Some lenders say others-- who do pay their mortgage payments-- end up bearing that cost.

"As the banks and lending companies take those losses, they build that in the cost of doing business going forward," said James Pulsipher, Regional Vice President of Fidelity Mortgage. "When that occurs, it affects the future price of everybody who's not in that situation in being able to purchase, the interest rates they pay and the regulations that we go through."

Pulsipher said it also creates a more tedious process for those who have no other option but foreclosure, since lenders become swamped with foreclosure filings.

Nonetheless, for some, it just makes financial sense.

"They're just going to look at it strictly as a business decision," Clement said.

For others who've experienced the hardships of trying to avoid foreclosure, strategic foreclosure is hard to grasp.

"We did everything, every piece of paperwork they wanted, every dime we could send," said Grand Junction resident Nichole Plant who struggled financially for years to avoid losing her home. "And then this person is just walking away because they don't have the equity they had in the beginning? I can't say it's wrong but I can't say it's right."

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