Foreclosure as a Financial Planning Option for Borrowers?

This Forbes blog post asks an interesting question: Is letting your house go to foreclosure a sound financial planning option?

The article notes the increasing foreclosure rates and attributes the continued rise in unemployment, the recent lender processing errors, and decreasing stigma associated with foreclosure.

To the extent that the homeowners are over-extended in a house that they can never afford, foreclosure may very well be an unavoidable option. But, I’d stop short of calling it a “sound strategic” choice.

Walking away from a house can lead to harsh consequences. A foreclosure may leave a deficiency balance on the homeowner’s loan, which the lender can later sue for. An abandoned house can incur accruing taxes, homeowner’s association expenses, or other third party claims that the owner would be liable for while the foreclosure is pending.

From a creditor’s perspective, the realization by an owner that she can’t afford the mortgage and must surrender the property may, indeed, be the first step in straightening out her financial health. But, simply walking away from the real property shouldn’t be viewed as a smart “strategic” option, because of the harsh consequences that will probably follow.