Housing News

A Closer Look at Strategic Defaults

Too bad, they won’t pay.

America’s strategic defaulters are exactly growing. It may be attributed directly to the property crisis but that doesn’t mean every person who walks away from his or her house can’t pay. Some just don’t want to pay (that’s why it’s strategic in the first place) . Case in point is Florida. The Miami Herald says, “As property values have plummeted by an average of 50 percent, such strategic defaults now make up a sizable chunk of South Florida’s foreclosures. In the fourth quarter of last year, they accounted for an estimated 28 percent of all defaults in Miami-Dade and Broward counties, according to recent research from the credit bureau Experian and Oliver Wyman, a New York-based international consulting firm. That’s up from 8 percent in the same quarter two years ago. With property values down even further now, researchers are certain the numbers have risen even more.”

And that’s not only in Florida. The rate of strategic defaults has grown higher that real estate professionals are pressed with this very alarming issue. The Experian-Oliver Wyman 2009 study also concludes that “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.”

Now we’ve come across a relevant research paper on these findings.

In June, the Chicago Booth / Kellogg School Financial Trust Index published a paper entitled Moral and Social Restraints to Strategic Default on Mortgages in which it studied the American households’ propensity to default when the value of their mortgage exceeds the value of their house even if they can afford to pay their mortgage (strategic default). The research team concluded “The most important barriers to strategic default seem to be moral and social. Ceteris paribus, people who consider it immoral to default are 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so. While moral attitudes toward default do not seem to be affected by the surrounding environment nor by the anger people exhibit vis-à-vis the current environment, the social pressure not to default is weakened when homeowners live in areas with high frequency of foreclosures or know other people who defaulted strategically. Our results suggest that these contagion effects should be seriously considered in public policy regarding housing.”

Going back to the Experian study, it seems that the high foreclosure rates in California and Florida can partly influence the high rates of strategic defaults in both states as suggested by the research paper of the University of Chicago. This also tells us that aside from forgetting about their moral values when it comes to defaulting, there’s a lose set of lending standards that allow these people to just walk away from their homes.

So the next time you realize your neighbors already deserting their 4BR property, don’t judge them for being too cruel to their lender. Maybe, the 10 foreclosed homes in your area could have influenced their decision.

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