Strategic defaults, which occur when homeowners make a decision to stop paying their mortgages rather than finding themselves unable to do so, are on the rise, according to two independent studies by researchers at the University of Chicago and Northwestern University. Both studies indicate that in an increasing number of foreclosure scenarios, the problem is not that the homeowner cannot pay his or her mortgage, but rather that they feel it is no longer beneficial for them to do so. In March of 2009, 22 percent of defaults were perceived to be strategic. That number has climbed by 9 points since last year, to 31 percent as of March of this year.
There are a number of factors contributing to this trend, report the researchers:
· The social stigma of a foreclosure is eroding quickly as delinquencies become more commonplace.
· There is an increasing perception that lenders are not “going after” borrowers who simply elect to walk away. In March 2010, homeowners believed that they had nearly a 1 in 2 chance (46%) of walking away from their mortgage without facing collections later.
· Their neighbors are getting loan modifications. Strategic default likelihood goes up 23% the second a neighbor with negative equity gets a loan mod approved. Borrowers who are heavily underwater fail to distinguish between their underwater situation and that of a neighbor in a similar house, apparent straits and location.
· Less than three-quarters of homeowners (74%) are worried enough about their credit score to stick around. While a hit to the credit score can be a deterrent for many homeowners, more than a quarter do not find credit score alone significant motivation to opt out of a strategic default. Furthermore, according to Morgan Stanley, homeowners most likely to walk away actually have high credit scores, but also mortgage balances in great excess of the current market value of their homes.
· Alternative financing makes buying a new home attractive. Strategic default increases by 29% if the homeowners can find a different way to finance a new home. Instead of selling off the old one, then buying, they are simply walking away.
Okay, get your stopwatch out. How long before real estate investors’ usage of creative financing strategies will be blamed as a primary catalyst for the problem of strategic defaults? Are you working with homeowners who are underwater but still fully capable of financing their current mortgage? How do you handle this situation? Is it anyone’s business but their own?
Note – on Thursday night (May 7) at 9:00 PM ET, I’m hosting a special educational webinar during which I and my own personal real estate mentor and coach will talk about the serious issues of today that directly effect real estate investors. This will be a candid and very frank discussion. Like I said, my guest for this call is my own real estate mentor and he has 30+ years of direct real estate experience. He’s pretty gruff and direct, so don’t expect a lot of flowery language, but I guarantee you’ll learn a lot. I speak with him at least once per week, and this week, I’m letting you eavesdrop on our conversation – I think you’ll find it truly fascinating. To register (it’s 100% free), just go here.
Thank you for reading the Bryan Ellis Real Estate Letter – your comments and questions are welcomed and encouraged, so please use the comments area below. Thank you!
Interestingly this same topic was on the news last night with an interview with a professor of economics in Arizona who has favored “strategic defaults”. Interestingly enough it seems to be okay for large corporations, businesses and wealthy people (Donal Trump), to default on multi-milllion dollar loans on properties and feel no guilt. While the bank hammer on individual homeowners that they are morally corrupt if they decide to walk away from a money losing investment. Remember the banks are making 10 x the amount of the loans as they sells these loans off and leverage them to get other investment money into the banks. When the banks and corporate America is held to the same moral standards as individuals then the question of how moral is a “strategic default” can be discussed with more clarity.
BRAVO, Charles!
Bankers and Wall Street (Goldman Sachs) hacks “banked” on homeowners desperately (trying to) hold onto their properties.
…at ANY cost!
…despite ANY illogical reasons.
Guess what, bankers and “Gold”man Sachs guessed wrong. Home ownership is important but NOT at the risk of LOSS of net worth.
The American people are NOT stupid.
We can throw the bums on Capitol Hill out of office for handing blank checks to bankers and Wall Street.
We can walk away from houses so far underwater it would take a submarine to check out the floor plan.
Damn straight strategic defaults are business decisions for business people and Joe Mainstreet.
Morality doesn’t just apply to Joe Mainstreet. I pity the fool who tries to make any of us feel guilty about walking away.
If the numbers do NOT work out, I’d walk away from four walls and a roof in a New York second.
Put that in your pipe and smoke it, Mr. Wall Street investment banker.
The banks make ‘loans’ on RE upon their fair market value (aka what the public will pay) for a piece of Real Estate. If the value was ‘X’ at the time of the note being created upon the borrowers signature (very true).then why can’t the note value (and balance owed) deflate along with the asset pledged as collateral??- and inflate as the value increased?? Everybody is looking for a free lunch. Trading living quarters like stocks- ..is every thing in the entire world one big bet??
I will tell you why the loan balance will not fluctuate with the value of the property- because the note holder wants their money-weather or not the method and/or means by which the money and profits where created where legit or sustainable.Deflation is an almost certainty when debt levels become unserviceable. We have a debt based currency system in most of the ‘modern’ world- which means new money is created (not taken from some stupid safe somewhere) whenever a signed promise to pay is signed by the ‘borrower’- in this case a mortgage note. If the value of the asset drops in value and banks have no skin in the game, get bailed out by the government, charge interest on YOUR signature and then get the property back ( to resell to some other unsuspecting jerk) when you can’t / won’t pay them back due to market forces out of your control…..sounds like a racket of a by the Bankers ,…..yeah like in racketeering……
a nice legal form of a long drawn out process of ( ‘legal’) property confiscation.
end the fed.
have fair and sound money.
the we do it now is not a way that will work for very much longer-
think about it