Consider This Before Executing A Strategic Withdrawl

I was listening to a special report on CNN on Saturday morning about the current status of real estate in the United States. Very interesting discussion. The panel of experts really were real estate experts this time.

One of the things they discussed was the concept of a Strategic Withdrawl (SW) from home ownership. Strategic Withdrawl is for people who are way underwater on their property; in other words, they owe a whole lot more on their house than it is worth ... perhaps they owe more on the house than it will ever be worth again.

Such people often feel that continuing to make the monthly mortgage payments on such a property is a waste of time and money, so they have an attorney arrange an SW for them. Arranging an SW is very complicated and needs to be done by an attorney, and even then it is a somewhat questionable way to become free of a property.

The panel pointed out that people who are upside down in a mortgage and arranging an SW are quite often the owners of luxury homes that they paid too much for when purchasing it. Apparently you don't see the owners of modestly priced homes contemplating an SW very often. Quite often, people doing an SW have healthy incomes and plenty of assets. They have good credit ratings and pay all their bills on time -- except for the upside-down mortgage.

Therein lies the root of the SW problem.

I'm not going to make comments on the moral, legal or ethical questions concerning a Strategic Withdrawl. That is not for me to decide. But there is a business question that needs to considered before you implement an SW with your attorney's help.

Since many of the people who do an SW have an otherwise stellar credit record, stopping payment on a mortgage is clearly a conscious decision on their part. Most likely, they could pay the mortgage as easily as they pay their other monthly debts. But they choose not to.

So when it comes time to face the music on this decision from a credit rating standpoint at some point in the future, these people should not be surprised to find out that they are treated very harshly by the credit reporting agencies. Punitively, as a matter of fact.

And why not?

After all, it's not as if they stopped paying their mortgage because of some financial setback that was no fault of their own ... like a lost job, medical bills, or some other money-related disaster. These people simply looked at the value of the property in today's market and decided that the monthly payments no longer matched up with the value of the property. So, they decided to stop paying the mortgage but continued to pay all their other debts. So, why shouldn't the mortgage companies and credit reporting agencies hit them hard? Seems perfectly logical to me.

I'm writing this for anyone out there who is considering the implementation of an SW. Despite what others may say about your future credit standing, don't be surprised if it is a long, long time before you ever get a loan at prevailing interest rates.

My advice? Before you do a Strategic Withdrawl from a piece of real estate, you need to do a lot of in-depth research into the short and long term consequences of such an action.

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