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Strategic Defaults: It’s What’s For Dinner
November 3, 2009 by Neil · 2 Comments
Since I last wrote about strategic defaults, many people approached me, and thought the phenomenon was imagined or blown way out of proportion. The downside to walking away from your home is losing about 100 points from your credit score, and ineligibility for a new mortgage for seven years. That appears to be a small price to pay, literally. About 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study that Experian spearheaded.
If the equity in homes has disappeared, it is a financially prudent, if not ethical, decision to walk away. Hell, why not have your spouse, or a relative, buy a house at a low interest rate with FHA money, use the gimmicky tax credit toward the downpayment, and reduce your monthly nut? Better yet, rent until the housing market is in total disarray. Yes, even more than now. The mortgage unit of Citigroup has an estimate on how many borrowers strategically default.
A) 1 in 50
B) 1 in 20
C) 1 in 10
D) 1 in 5
The correct answer is D, one in five! 20% of all borrowers are probably throwing their keys when they don’t even have to. This is mind-boggling, or as the kids are texting these days, OMG WTF POS.
More defaults, strategic and otherwise, brings a glut of housing, which in turn drives down rents for residences and multifamilies.
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Check out what others are saying about this post...[...] The unemployment rate is north of 10%. The combined U-6 number for unemployed and underemployed is 17.5%. There appears to be a correlation between rising joblessness and mortgage delinquency. This, however, is not the complete picture: The good folks at Citibank estimate that 1 in 5 home mortgage delinquencies occurs by choice, not necessity. [...]
[...] while strategic defaults are a real phenomenon, they are also an overestimated one. According to the brass at Citibank, 1 in 5 mortgages default [...]