By Lynn Reaser
Last year, home foreclosures totaled a record 2.8 million in the United States and a further rise to 3.8 million could take place in 2010. As job losses and reduced incomes have continued to drive home foreclosures upward this year, a new trend has also appeared. This is the “strategic default.” Homeowners who are still financially able to make their mortgage payments are increasingly choosing to hand in the keys to the bank,
According to a study from the Kellogg School of Management at Northwestern University, 31% of all U.S. home foreclosures were “strategic” at the end of the first quarter, up from 22% a year ago. This has occurred as many homes are now “under water,” representing a situation where the value of the home has dropped below the total cost of the mortgage. Nationally, First American CoreLogic estimates that this is true for nearly a quarter of the homes throughout the country and about a third in California.
It does not always make financial sense for people to follow the strategic default route. After all, they will need to find another place to live and pay the moving expense. Generally, walking away is economically rational where borrowers owe 25% or more than the house is worth.
What about the ethical responsibility of borrowers? Americans appear to be less troubled about walking away from their loan obligations than in the past. Researchers have also found a certain contagion effect in default patterns. Homeowners are more likely to default if they see their neighbors doing so. While the social stigma of defaulting is declining, legal and financial forces have also subsided. The Northwestern study shows that banks and loan services in many cases are not actively pursuing delinquent borrowers, a development perhaps reflecting the workloads now faced by these institutions.
The trend of “strategic defaults” raises important questions about individual responsibility and the integrity of contracts. Americans’ anger with banks and their lenders appears to have made them less concerned over abrogating mortgage debt obligations. Larger issues of trust and accountability are, however, at stake. Reneging on any type of obligation or commitment—financial or otherwise–should not be taken lightly.