Strategic Defaults on Mortages Up to 12 Percent of All Defaults

A rising tide of mortgage defaults is on the horizon and they are known as "strategic" defaults. "Strategic default" is the technical term for Americans who choose to stop making mortgage payments for three months or more, while continuing to pay their consumer debt. In other words, they can afford to pay their mortage, but just decide not to. The housing analysts say that strategic defaults primarily occur when a home's value has dropped below the remaining balance on their mortgage. Since an estimated one in five U.S. Homes with a mortgage has "negative" equity or is valued less than the mortgage, it is not hard to imagine why this figure has begun to rise.

Strategic defaults accounted for at least 12 percent of all defaults in February 2010, according to a recent Morgan Stanley report. In 2008, there were 588,000 strategic defaults nationwide. In California the number for strategic defaults was 68 times higher than in 2005. While the Obama Administration is attempting to encourage cuts to the principal on mortgages, the qualifications for such mortgage programs are nearly impossible for homeowners to qualify for. In addition, banks are reluctant to participate for fear of reprisals from others who may have received modifications.

Who are the people who are defaulting? It's not who you might think. A recent study by Oliver Wyman and Experian showed that people with high credit scores, and perfect payment histories are more likely to be a strategic defaulter. Strictly speaking, these borrowers see the decision as a highly charged and emotional. They feel a great anxiety about their situation, are overwhelmed by a sense of hopelessness and are just plain angry. At the same time, they are clearly somewhat sophisticated and even though they understand the potential impact to their credit, it ultimately appears as a practical solution to their circumstances.

In the end, these people may be contributing to the economy, on a temporary basis, by boosting consumer spending. Chief economist at Moody'sEconomy.com, Mark Zandi indicates that borrower's who aren't making mortgage payments are probably skipping roughly $100 billion annually, an amount equal to approximately 1 percent of consumer spending.

So, despite the ethical and moral implications of skipping out on their mortgage, strategic defaulters may be contributing to the recovery of our economy, albeit in a unlikely way.

http://news.yahoo.com/s/bw/20100511/bs_bw/1020b4178045116389

http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story

http://blogs.wsj.com/developments/2010/05/10/the-psychology-of-strategic-defaults/