Will the strategic mortgage default trend continue? Will it accelerate? What will the effect be?
The latest Phoenix foreclosure report showed that the Phoenix real estate market seems to be rounding the corner in terms of the number of foreclosures, though I predict a new wave of foreclosures in higher-end markets, like for Scottsdale homes. But given that the number of Phoenix foreclosures is still relatively high, what does that portend for strategic defaults?
Lenders have long since gotten tougher on homeowners who have foreclosures or short sales on their records, and the FHA recently announced new changes in its rules that make it tougher for homeowners with recent short sales to get new FHA-backed loans.
But will we see other market reactions to this bizarre trend of homeowners throwing in the towel? Maybe. . . I certainly think that widespread strategic defaults could wreak havoc on our mortgage lending and home buying system. As I said in a recent PR Web press release titled Strategic Mortgage Defaults: Phoenix Real Estate Agent Spurs National Debate, “Strategic defaults damage the mutual sense of trust and confidence between parties in a business transaction. If banks can't rely on homeowners to meet their mortgage obligation, interest rates will rise substantially to make up for the increased risk banks assume on every loan. Loans will become more expensive, and less accessible.” That, of course, would be a bad thing.
In other words, while I do see the financial rationale behind walking away for homeowners who are so deep underwater they may never see equity, I also believe that 1) if the trend really catches on it could be very bad for the housing market and the economy; and 2) homeowners who are thinking about walking away should be very aware of the consequences of that decision -- it is a breach of contract, after all.
Read more about Phoenix real estate strategic defaults on my blog.
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