The L.A. Times’ Ken Harney wrote this article on the study of homeowners with good credit histories intentionally defaulting on their mortgage:
* 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.
* Two-thirds of strategic defaulters have only one mortgage — the one they’re walking away from on their primary homes. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.
* Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore — a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion — are far more likely to default strategically than people in lower score categories.
* People who default strategically and lose their houses appear to understand the consequences of what they’re doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters “are clearly sophisticated,” based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.
Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: “Well, I’m $200,000 in the hole on my house, and yes, I’ll damage my credit,” he said of defaulters. But they see it as the most practical solution under the circumstances.
Here’s an example where the high foreclosure rate is feeding on itself, leaving many more possible defaulters behind with high mortgage balances and little hope.
I’m not picking on San Elijo Hills, just trying to help – because if there isn’t a pot of gold at the end of this rainbow, there’s more trouble ahead:
Fron the WSJ:
Strategic default is most likely when home values have fallen by more than 15%, according to the study by authors of the Financial Trust Index, a joint project of the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management.
The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%.
“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”