Fewer Borrowers Strategically Defaulting

June 24, 2011

The percentage of borrowers who walk away from their mortgage despite still being able to pay is shrinking. Yet strategic defaults still account for nearly one-fifth of serious mortgage delinquencies, HousingWire reports.

About 17 percent of all mortgage defaults that are 60 days or more past due in the second quarter of 2010 were strategic defaults. In the second quarter of 2008, that percentage peaked at 20 percent — which is more than double the number of strategic defaults in 2006, according to a study from Experian, a credit reporting agency, and Oliver Wyman, a consulting firm.

Strategic defaults tend to be more common with borrowers who have jumbo mortgages and have higher annual incomes, according to Experian.

In the second quarter of 2010, 30 percent of strategic defaulters earned more than $150,000 a year, and only 9 percent earned less than $40,000, Experian reports. Furthermore, 33 percent of delinquent mortgages were on homes more than $1 million. For comparison, only 6 percent of homes priced at $50,000 were attributed to strategic defaults, Experian notes.

Experian notes borrowers with more expensive homes and higher incomes may be more financially savvy and be able to take the impact to their credit score more so than other types of borrowers.

As home values began to dip in 2007, more borrowers became underwater on their homes, causing some to stop paying their mortgage and walk away from their home.

Strategic defaults in general "aren’t likely to decline much unless residential housing prices increase and remain at higher levels," according to the report. "Home owners have to see for themselves that their neighbors' houses are selling for higher prices."

Source: “Overall Strategic Default on the Decline,”HousingWire (June 23, 2011)