Strategic defaults starting to decline slightly

Tuesday, May 31st, 2011 By

An abandoned house

The number of people entering into strategic default has decreased slightly. Photo Credit: Gentle/Wikimedia Commons/CC-BY-SA

Over the past few years, the term “strategic default” has entered into the national consciousness. People who owe more on a mortgage than the home is worth simply stop paying and walk away because it isn’t worth the trouble. This practice had begun to increase since the 2008 housing crash, but now the tide is starting to recede, if only slightly.

Credit bureaus and banks getting wise

Banks, loan lenders and credit bureaus have been perturbed by the rise in the number of strategic defaults on mortgages in the past few years. Borrowers that owe more on a mortgage than the house is actually worth will default on their mortgage when the value of the home has dropped so low that it no longer makes any sense to continue. In order to ferret out which consumers were defaulting because the cruelty of circumstances left them unable to make payments from the ones who were just giving up, Fair Isaac and Company, one of the main credit rating agencies in the United States, devised a way to find out which troubled homeowners are likely to engage in strategic default. According to the Chicago Tribune, an estimated 35 percent of all mortgage defaults were strategic in September 2010.

New car and cards a dead giveaway

People who strategically default usually will use available lines of credit just before walking away from the mortgage. New credit cards will be opened up, personal loans taken out to finance the move and new cars will be purchased. Then the underwater homeowner walks. FICO is also working with loan lenders and banks to help them identify potential defaulters before they walk. However, according to SmartMoney, the number of people walking away when it suits them is dropping. It is estimated by the University of Chicago Booth School of Business that strategic defaults dropped to 30 percent in March of this year, down from 37 percent in January. JPMorgan Chase analysts, according to Mortgage Wire, found that the overall rate was decreasing.

Consequences of default

Fannie Mae conducted a survey some time ago that found 27 percent of respondents, according to the Chicago Tribune, found the idea of strategic default acceptable. Consulting agencies began springing up that would advise consumers about how and when to default to their best advantage, such as the website, according to Forbes. Yet people who do strategic default face potentially stiff penalties, according to MarketWatch. Credit scores can lose up to 200 points, leading to a host of other consequences. Landlords and insurers may be less willing to rent to or insure someone who has defaulted, and Fannie Mae has declared that it will not insure a new mortgage for someone who has strategically defaulted. It is estimated that 42 percent of all homes are “underwater,” or worth less than the amount of money owed on the mortgage.


Chicago Tribune

Chicago Tribune





Previous Article

« Teen spending affected by the recession

The recession has curbed spending even among the teen demographic and leads to their keener financial awareness, according to a new survey. Impulsive teen shopper
Next Article

Little extras equal billions for airlines »

A newly released report says that baggage fees and other non-transportation charges add up to billions yearly for the airline industry. airline baggage

Other recent posts by Sam Hoober

Credit card use declining as more people turn to cash

Credit card use continues to decline. Fewer and fewer people are turning to the plastic because more people are trying to shed debt.
Visa logo

Banks fighting to corner market for EMV chip credit cards

JPMorgan and Wells Fargo are launching EMV chip equipped smart cards for high-end credit card customers who travel overseas frequently.
Smart card

Mortgage rates rise despite crippled demand for housing

Mortgage interest rates are steadily climbing away from the near record lows that were recently observed, but home sales are staying low.