Strategic Default Option Popularity Grows

June 9th, 2011
in econ_news

foreclosure notice Econintersect:  The term 'strategic default' refers to someone who can afford to make mortgage payments chosing not to. They may simply turn in the keys to the lender and walk away or, in some cases, live rent free until foreclosure is completed.  As reported in GEI News last week, stopping payments and waiting for eviction creates an average term of more than than two years of rent-free, payment-free living.   Last year 14% of homeowners said they would consider a strategic default, according to CNN Money.  This year the number has almost doubled to 27%.

Follow up:

Why would someone take this drastic step?  It is a business decision response when the homeowner find themselves deeply 'under water' on their mortgage, owing much more than the property could be sold for.  According to CNN Money, 12% of all mortgage defaults in 2009 were strategic.  Based on the new data from CNN Money, it appears that percentage will be rising considerably for 2010 and beyond.

Mortgage and real estate pro Michael David White wrote the following at Housing

Most walk-away borrowers are good credit risks with high FICO scores. One Florida couple paid $1.4 million for a house which is now worth $400,000. They are still paying, but not all borrowers would stick with that mortgage.

Consumers are adapting the rationality of professional investors. An investor who purchases an office building may use a company to make the purchase and borrow the money. If the value fell by half while the mortgage is 70% of the original price, and if the loan is not personally guaranteed, the investor might send in the keys and wish the lender good luck.

“There’s a sense that the banks don’t follow the ‘rules,’ but somehow the little guy is supposed to — more and more people are saying ‘enough is enough’ and walking away,” said Brent White, a law professor at the University of Arizona, and author of “Underwater Home: What Should You Do If You Owe More on Your Home than It’s Worth?”

White reports on news about mortgages and real estate almost daily.

Real estate expert Keith Jurow, author of the MVP Housing Market Report, has posted an article at GEI Analysis that determined strategic defaults were increasing and becoming more and more of a problem for a housing market that can not seem to find a bottom.  Jurow wrote:

In late January of this year, a report on strategic defaults issued by the Nevada Association of Realtors seemed to confirm the findings of the two studies I’ve discussed. The telephone survey interviewed 1,000 Nevada homeowners. One question asked was this: “Some homeowners in Nevada have chosen to undergo a ‘strategic default’ and stop making mortgage payments despite having the ability to make the payments. Some refer to this as ‘walking away from a mortgage.’ Would you describe your current or recent situation as a ‘strategic default?’”

Of those surveyed, 23% said they would classify their own situation as a strategic default. Many of those surveyed said that trusted confidants had advised them that strategic default was their best option. One typical response was that the loan “was so upside down it would never have been okay.”

What seems fairly clear from this Nevada survey and the two reports I’ve reviewed is that as home values continue to decline and loan-to-value (LTV) ratios rise, the number of homeowners choosing to walk away from their mortgage obligation will relentlessly grow. That means growing trouble for nearly all major housing markets around the country.

Learn more about Jurow's highly praised Housing Market Report and watch him talk about why he started the report here.

Sources:  Housing, CNN Money, GEI Analysis and GEI News 

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