Many wealthy homeowners are making a business decision: foreclosure. This strategy is commonly referred to as “strategic default.” In 2011, RealtyTrac revealed that over 36,000 homes with values exceeding $1 million were foreclosed on, and although these foreclosures constitute only 2% of the total U.S. foreclosures, this number is much higher than in years past. Since 2007, foreclosures for homes valued at $1 million has jumped 115%; for homes worth $2 million, foreclosures have skyrocketed to 273%.
Typically, these types of homeowners have been able to delay foreclosures because they either have the financial wherewithal to delay or lenders have cooperated with them. However, this latest strategic default trend showcases that wealthy homeowners that can still pay their mortgage are simply making a cost-benefit business decision and are walking away from their obligation. With a foreclosure process that takes a year or more—allowing essentially free rent—and with their debt exceeding their home’s value, wealthy homeowners simply quit paying.
According to CNNMoney: "‘In the lower-priced houses you’ll see more people defaulting because they can’t afford the payments and it’s a choice between feeding their family and paying the mortgage on a home that’s under water,’ said Stuart Vener, a national real estate and mortgage expert with the Florida-based Wilshire Holding Group. ‘In million-dollar homes, you're looking at people who can afford it, but they have to make a business decision: Does it make sense to make payments on a mortgage when the home is worth less than they owe?’ he said. In many cases, it often makes more financial sense to walk away."
While 98% of distressed homeowners are foreclosed upon more rapidly, and are often left simply trying to figure out ways to feed their family and find shelter, the 2% are “strategically defaulting” and often have more than 340 days to live rent-free before they are evicted from their homes.