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21
Will Falling Values Lead to More Strategic Defaults?
As prices continue to soften, more and more homeowners will fall into a position of negative equity on their homes. This means that the balance on their mortgage is greater than the value of their home. The reason this is important is that people are more prone to strategically default on their mortgage when 'underwater'.
What is a strategic default?
Let's first define strategic default in simple terms. According to Wikipedia: A strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments. This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house's price such that the debt owed is (considerably) greater than the value of the property – the property negative equity or "underwater" – and is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are called "walkaways." This definition itself serves as the explanation as to why people will default.
How do Americans view strategic default?
In Fannie Mae's recent National Housing Survey, they shed some light on American's thoughts on strategic default.
- The number of underwater homeowners who believe it is okay to default on your mortgage if you are under financial distress has almost doubled in the last twelve months (14% to 27%).
- 47% of people that are underwater and behind on their mortgage have considered strategic default.
- Those who know a strategic defaulter are more likely to have considered defaulting.
- 1 in 5 Americans knows a strategic defaulter
Bottom Line
As more people enter into negative equity, more will be tempted to 'walk away' from their mortgage obligations. If they do walk, that will increase the number of homes entering foreclosure. Keep checking RuhlHomes.com for more information on the housing market.
