Strategic mortgage defaults heading up - Las Vegas mortgage borrowers tempted

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Las Vegas, NV, homeDespite sporadic indications that the real estate market is settling down homeowners still feel antsy. They are now considering a strategic default - a tactic generally used when the home loan balance is higher than the property's value - more often than before. This is being done even when they can afford the payments.

University of Chicago's Booth School of Business and Northwestern University's Kellogg School of Management conducted a study on strategic mortgage defaults and the numbers they arrived at are harsh. In March roughly 31% of foreclosures were labeled strategic, up 9% from March of 2009. So, now about one third of them dominate the foreclosure talk in the banking industry and among policy makers in Washington, a scary trend.

One major reason to the increase is that mortgage borrowers in general believe lenders wouldn't track them down for what they are owed. Whether they will or will not depends on many variables, among them state laws, their own policies and the spread between outstanding balance and home value. Regardless, 56% of homeowners are betting that it's safe to do, according to the universities' research.

When an underwater homeowner was granted a limited mortgage release the possibility of a strategic default grew 23% among the rest of the people in the same neighborhood, says the study. Perhaps the thinking is that if they walk away the lender would do the same for them. Or offer other concessions. In many regards what is going on in neighborhoods will often determine which direction others will go. It's easier to commit to something when someone has already done the same, or at least something similar. Or is about to do it.

If there are a lot of strategic defaults in a given subdivision, it'll probably encourage still-paying underwater mortgage borrowers to contemplate joining in. And it can easily snowball from there, dragging the area ever deeper into the morass of declining home values and general plight. Las Vegas has many neighborhoods that are in the grip of this deterioration, where For Sale signs line the streets, sprinkled in among vacant houses with dead lawns. If the study was done here only, it would likely show the number higher than the national average of 31%.

The government is pushing the home loan industry to do more to alleviate the still growing foreclosure problem. The resistance to it remains, although lenders have lately switched focus toward short sales as a solution. It's better, if structured correctly from the homeowner's standpoint, than a full-blown foreclosure. It does help some, but as the March figures show it hasn't turned the tide yet. 

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Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006


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