More Underwater Homeowners Considering Strategic Default

By
Real Estate Agent with The Holli McCray Group 319217

My Take:  People are looking at their homes as bad, or even toxic, investments.  It's  like owning a stock that was now worth less than what was paid for it with little to no chance of it regaining its value in the near future.  Why hold onto it?  Morals and borrower responsibility are obviously added variables that come into play when discussing one's mortgage versus owning a stock. These variables should not be discounted. However, many people aren't seeing the incentive in paying their mortgage on an asset that is worth less than what is owed, ESPECIALLY in a situation where the homeowner is tight on money.  Poeple are deciding that it makes more sense  to allocate their money elsewhere.

 

Survey: More Underwater Homeowners Open to Strategic Default

05/13/2011 By: Carrie Bay , DSNews.com

Nearly twice as many underwater borrowers think it is okay to walk away from a mortgage if they face financial distress than harbored this sentiment a year ago, according to a survey conducted by Fannie Mae.

The GSE found that because of feelings that they are less financially secure, 27 percent of homeowners with negative equity would consider strategic default as a viable option. That stat is based on a nationwide poll taken during the first three months of this year, and is up from 15 percent who answered so in the January 2010 survey.

While more homeowners may be leaning toward strategic default should they find themselves in financial distress, the Chicago Booth/Kellogg School Financial Trust Index, which regularly assesses Americans' trust in various aspects of the nation's financial system, found that the number of strategic defaulters appears to be trending down, at least based on the perceptions of their fellow homeowners.

The index recorded a decrease in strategic defaults among all states to 30 percent in March 2011from 37 percent in December 2010.

Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business and

co-author of the survey, explained that these figures are based on the number of actual strategic defaults in the eyes of the neighbors.

According to Paola Sapienza, survey co-author and professor of finance at the Kellogg School of Management at Northwestern University, the decline in the number of apparent walk-aways "might be due to the increase in the perceived probability that a lender will go after a strategic defaulter."

Respondents to the academia poll said they believe homeowners are choosing not to pay their mortgages because they are unemployed or underemployed (46 percent) or because they over-borrowed (35 percent) due to the state of the economy.

The researchers also asked participants about their feelings toward recent news that some banks conducted foreclosures using flawed documentation.

They found that 97 percent of respondents believe banks should pay a fine for their actions. More than half of respondents preferred that fines paid by banks be given to struggling homeowners.

"People are sympathetic to the plight of the American homeowner - on why homeowners are struggling to pay their mortgages and why they would choose to walk away from their loan," said Sapienza.

"Our report indicates that Americans believe accountability lies with lenders and financial institutions," Sapienza continued. "For example, for homeowners who were victims of deceptive lending practices, respondents were more likely to say that bank fines should help those individuals."

On the other hand, survey participants said they were less in favor of bank fines being used to help homeowners who over-borrowed.

 

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Topic:
Home Selling
Location:
Tennessee
Tags:
short sale expert
short sale process
do a short sale
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knoxville short sale
sell home avoid foreclosure

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Rainmaker
437,508
E.J. "Mike" Carlier
Lakeville MN
CENTURY 21 MarketLink Realty

John, I feel that your assessment of how some homeowners perceive their situation is unfortunately too accurate.  The description, however, is only correct if the homeowners don't like their homes or have needs that are not met by remaining there.  At that point, the home is no longer a lifestyle asset, but a lifestyle liability.

Smart lenders and smart government leaders would find a way to allow qualified homeowners to port their debt to another home that fits their current needs.  The costs and risks are almost nonexistent, and the part of America that has been shackled by a lack of mobility and lifestyle degradation would come back into the housing market.  The alternative is to compound the economic drain on the economy and to unnecessarily add more inventory that will continue to feed the downward spiral.

I'm afraid that morals may fall on the side of the voluntary defaulters who are basing their decisions on their families' needs over the needs to get a gold star from BOA.

May 19, 2011 10:14 AM
Rainmaker
72,463
Chicago Real Estate
Goran Utvic
Goran Utvic | Chicagoland Brokers Inc, Chicago IL 60656

John and Holli - I agree, a short sale is the best exit strategy for a homeowner experiencing a hardship.

May 19, 2011 12:59 PM
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Rainmaker
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John Verdeaux

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