Strategic Defaults on Mortgages are Rising

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Some homeowners believe that lenders are failing to pursue those who default on their mortgages, which creates a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments, states a Housing Wire article.

The researchers found that the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009.

One likely reason for this growing trend is the increasing perception that lenders are not going after borrowers who walk away. In December 2009, the average homeowners surveyed said the probability that a lender will go after a borrower is 56 percent, as compared to 54 percent reported in March 2010.

The growing importance of strategic defaults is in line with the recent Obama administration’s new set of housing initiatives.

The Wall Street Journal also reported that, more homeowners are willing to walk away from their homes voluntarily, according to new research released by the University of Chicago and Northwestern University. About 31% of foreclosures in March were considered “strategic defaults,” in which homeowners walk away when the value of a mortgage exceeds the house value — even if they can afford the mortgage. That’s up from 22% in March 2009.

The results also indicate that the likelihood of strategic default increases by 23 percent when homeowners learn that their neighbor with negative equity has received a partial loan for forgiveness. Additionally, strategic default increases by 29 percent if homeowners are able to find an alternate way to finance a new home.

“A key deterrent to strategic default is the fear of losing a good credit score,” said Zingales. “Approximately 74 percent of homeowners in our survey believe it is very important to maintain good credit and this can be a factor in encouraging them not to walk away,” states an article in Financial Trust Index.

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