A pair of studies released Thursday found that more homeowners are choosing to let an underwater home go into foreclosure, despite their ability to continue to make payments. Researchers at the University of Chicago and Northwestern University found that 31% of foreclosures appeared to be strategic, up from 22% in last year.
As the number of borrowers who walk away from their mortgages increases, the social stigma associated with foreclosure has started to wane, experts say. "It can be a very logical decision based purely on economics, numbers and returns," says Keith Gumbinger, of HSH Associates, a mortgage publishing website. "Is there better value to me to abandon this home and rent another one for less money?" A quarter of all borrowers -- 11.3 million homeowners -- were underwater on their mortgages at the end of 2009.
A Morgan Stanley report, also released Thursday, found that strategic defaulters tend to have higher credit scores, larger loan balances and more recent mortgages than those who remain in underwater homes. From an economic perspective, it makes sense for borrowers who are more than 25% underwater on their mortgage to consider walking away, says Paola Sapienza, a finance professor at Northwestern's Kellogg School of Management and a co-author of the study.
Borrowers who are up-to-date on their payments but underwater may also be walking away in protest after seeing government programs and bank policies aimed at their delinquent neighbors but offering little assistance for them, Gumbinger says. The Chicago study found that the probability of strategic default increases by 23% when homeowners learn that their neighbor with negative equity has received a partial loan for forgiveness.
Strategic defaults do not come without consequences for the borrower. A borrower with a 780 credit score could see his score fall 150 points after walking away. But if he keeps his credit pristine otherwise, he could be back in prime range -- and be able to purchase a home -- within two or three years, says Craig Watts, a spokesman with the credit scoring firm Fair Isaac.
Let's put credit scoring aside for a moment and think about the moral dimension. You can find thoughtful arguments both for and against strategic default. What do you think of the ethics of walking away from an underwater home, even if you have the means to pay?
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