Why haven’t you strategically defaulted?

May 16, 2011: Nearly twice as many underwater borrowers think it is okay to walk away from a mortgage if they face financial distress than harbored this sentiment a year ago, according to a survey conducted by Fannie Mae.

The GSE found that because of feelings that they are less financially secure, 27 percent of homeowners with negative equity would consider strategic default as a viable option. That stat is based on a nationwide poll taken during the first three months of this year, and is up from 15 percent who answered so in the January 2010 survey.

Respondents to the academia poll said they believe homeowners are choosing not to pay their mortgages because they are unemployed or underemployed (46 percent) or because they over-borrowed (35 percent) due to the state of the economy.
The researchers also asked participants about their feelings toward recent news that some banks conducted foreclosures using flawed documentation.

JPMorgan analysts used Standard & Poor’s/Case-Shiller indices and tracked prices against original loan amounts on a metro level. Then, analysts collected counts for all defaulted loans since 2007 and tracked those that started missing payments once the loan went underwater.

They found 60% of all defaults were strategic by the middle of 2009, more than double the percentage in January 2008. But analysts wanted to get more specific.

Using data from Equifax, the JPMorgan analysts looked at which borrowers did not experience a monthly payment increase before defaulting. Then, they added in which borrowers were still making payments on other debts after missing their first mortgage payment.

The final definition of strategic default used was the “percentage of defaults from underwater borrowers who started missing payments once underwater, continued paying their other debt, and had no payment increase on their mortgage.”

While the analysts admit they might still be overestimating the amount of strategic defaults when accounting even for all these variables, they noted the trend is going down.

Across the private-label mortgage-backed securities market, the analysts found 10,000 strategic defaults fit their definition, down from nearly 20,000 one year ago.

“Overall, strategic defaults have stabilized as home prices flattened, and initial jobless claims declined,” analysts said. “A trend worth watching, no doubt, but we can comfortably say that strategic defaults are less than 30% of all defaults, and the pipeline of borrowers [delinquent more than 90 days] has even lesser strategic delinquencies.”

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