In a new report from Fannie Mae, the government-controlled GSE revealed that 27 percent of homeowners admitted that they would consider walking away from their mortgage even if they could still afford it[1]. In 2010, only 15 percent said they would think about walking away from a mortgage they could still handle. Analysts say that consumers are adopting “the rationality of professional investors,” meaning, in this case, that if the investment is no longer paying then the consumer is likely to simply “send in the keys and wish the lender good luck.”
“The banks don’t follow the ‘rules,’ but somehow the little guy is supposed to,” said Brent White, a law professor at the University of Arizona. “More and more people are saying ‘enough is enough’ and walking away,” he added.
You might think that strategic defaulters are bad credit risks anyway, but lenders say that they come as more of a surprise than you might think. According to chief analytics officer at Fair Isaac (FICO) Andrew Jennings, most strategic defaulters are “good credit risks with high FICO scores.” And, furthermore, their credit recovers from the hit more quickly than habitual offenders. For example, one homeowner who stopped paying on two homes in 2009 took a credit hit from 750 down to 520, but it has already jumped back to 600 [2].
In fact, the biggest issue for many potential defaulters seems to be one of reputation and ethics. One couple whose $1.4 million house just appraised for $400,000 admitted that they did not default because their feared that their “public profiles” (one is a dentist and the other a financial consultant) could not handle the hit even though their credit probably could.
Do you think that if you can afford your mortgage and you promised to pay, you should continue to do so? Or is strategic default okay?
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[1] http://www.businessinsider.com/homeowners-who-will-consider-strategic-default-doubles-in-one-year-2011-6
[2]http://money.cnn.com/2011/06/07/real_estate/walk_away_mortgage/index.htm
I think I might walk away too. This is definitely a sign that consumers are becoming more savvy about their position and not hesitant to stop being loyal to an industry that is certainly not loyal to them.
It would depend on my overall financial situation and if I really loved the house and neighborhood, etc. If it was just a place to live, I’m probably gone!
What the heck have we come to. If you committed to a loan and can pay yes you should continue. If the Banks and the Credit Agencies are allowing restoration of credit that rapidly then shame on them for encouraging this increase in default. Is our word no longer any good? In addition letting the property go if you can hang on to it is not wise because the economy is cyclic and this down turn will go right back up and when it does everyone holding property stands to gain. It is just a matter of waiting for the upturn in a year or two. In other words property value is relative to the market and the market or economy always rebalances itself. Macro-Economics 102.
Given the condition the economy that it’s in, it might not even pick up in 5 years.
Fear of losing your job and exhausting your life savings to stay in a home that’s underwater can drive you to make a decision like this. It will only be a matter of time when these folks are going be looking at the “pink slip”… or the dentist losing patients due to job lose. Either way, their credit’s going to be shot.
And it’s not a matter of affording to pay your mortgage or that it’s ok to do a “strategic default,” it’s about being realistic.
Of course, you promised to pay, that undeniable. Ethially speaking you have no choice if you can still afford it. In that perfect world the banks would be behaving ethically too. We know, of course, they are not. Many of their policies are intentionally deceiving and many more negative adjectives I could use. If the banks would reduce the interest rates on all underwater homes to the level that would make their payment in keeping with the payment of the current market value; then I think the homeowner has no gripe. He would still be paying the full loan amount but at a reduced rate. In that scenario both parties compromised. The bank will eventually get their money, but not the same profit (and that is fitting). The homeowner still has to pay for the loan they agreed to but the payment is in alignment with the new market value of the home. It’s not a perfect solution but it is better than bankrupting FDIC with paying off the aggregious lenders and banks because they won’t do modifications, HAFA’s or other programs designed to help the homeowners.
If the banks can’t agree to something like this then I think I would walk away, accept the credit hit and do my best to make sure everything is paid scrupulously to repair my credit. If they don’t want to play fair and be reasonable and compromise then they have no right to expect other to keep their commitments. After all they can’t even keep their records straight and make sure they have the right to foreclose with all the necessary documentation.
It is time the banks take their lumps.