I’ve had some riveting dialog with a client that asked me to build a list of homeowners that are strategically defaulting on their mortgage payment. I knew this was a topic that had to be explored in a blog post.
Early on in our conversation, he cited Brent T. White, a University of Arizona law professor, who views walking away from an underwater home a purely rational business decision. Morality and emotions have no place in one’s decision to “strategically” default on a mortgage, says Professor White, the author of a paper entitled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”
There is an interesting TIME MONEY blog that is entitled with a provocative question: “Strategic Mortgage Default: The Irresponsible, Amoral, But Best Strategy?” > Read the entire blog here.
Our client says that if you do the simple math, it is better for homeowners to rent and re-enter the home market when prices are more favorable. If a house was mortgaged for 100K and it is now worth 50K, he says, the price has to double, something he doesn’t foresee happing in the course of a lifetime.
Our client wanted to target homeowners in San Diego County that were current on all their debts except their mortgage. We put together some filters to build this list. In addition to selecting his targeted area and selecting homeowners 60 days past due on their mortgage payment, we also zeroed in on defaulting homeowners that had an estimated income of over $100,000, and to further predict a healthy bill of financial health, selected homeowners that were current on bank card debt. He wanted only those homeowners with negative equity, so we selected borrowers with an LTV of 100+.
I certainly am not speaking in favor of a strategic default, but it’s an undeniable force in the real estate market. There are a staggering amount of homeowners that are walking away from their home, no matter what one’s moral views are on the subject. Nationally, an estimated 19 percent of delinquent mortgages involve a homeowner who could afford to pay but is opting to walk away.
Since this dynamic is becoming a larger portion of the distressed home inventory, should real estate professionals approach these strategically defaulting homeowners to advise them on solutions?
I knew this would be a polarizing issue. In one forum, one reader says,
Professor White probably has the same opinion about marriages that aren’t working. What’s become of our society?
Doesn’t a commitment mean anything anymore? The rationale about losing money is just that – and bad rational to boot!
What would be the difference if the mortgage company felt that they could make more off of your home by taking it away from you and reselling it to someone else?
After all, it’s just a business deal.
Yet another reader checks in to say emphatically that agents should get their message out to these homeowners headed for strategic default:
Of course we should. Homeowners are walking because they don’t understand they have options. The best one (in most cases) is a strategic short sale. These homewoners mistakenly think they must have a hardship to do a short sale. That’s just not true any more.
In my market a homeowner that bought in 2005 and placed 20% down could now owe more than 4 times what their property is worth!! This is a fact. To continue paying in to this black hole is foolishness. Take the loss now and get on with your life. This is NOT a moral issue.
Where do you check in?