Strategic Mortgage Defaults Rising in Hard Hit Regions

If I was to ask you who was more likely to default on a mortgage in Florida, a person with a high credit rating and perfect payments whose house is severely underwater or the person with an average credit rating, the answer would surprise you.

It would be the person with the high credit rating, and they would not default because they could not pay, they would default for strategic reasons. Kenneth Harney, the esteemed real estate columnist with the Washington Post found these nuggets:

• The number of strategic defaults is far beyond most industry estimates – 588,000 nationwide during 2008, more than double the total in 2007. They represented 18 percent of all serious delinquencies that extended for more than 60 days in last year’s fourth quarter.
• Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they’ve fallen behind on other accounts.
• Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida, it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.
• Two-thirds of strategic defaulters have only one mortgage – the one they’re walking away from on their primary homes. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes. via the Baltimore Sun

The idea that mortgage defaults are now just with families that are struggling is outdated. Those who are in hard hit markets are essentially saying that blowing up ones credit rating is worth avoiding the large financial hit that an upside down mortgage will do to the families finances.

The mortgage companies and banks have another big piece of the pie to analyze. As the Chinese curse says, “May you live in interesting times.”

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