‘Strategic Default’ Poses Ethical Question

January 9, 2012

With fallen property values, some home owners who owe more on their mortgage than their home is currently worth are turning over the keys and walking away — a move known as “strategic default.”

The growing number of strategic defaults across the country is alarming, particularly since many of these home owners can still afford their mortgage payments but are choosing to walk away anyway. 

In 2010, about 30 percent of mortgage defaults were from home owners who could afford to make their payments — that’s up from 22 percent in 2009, according to a 2011 survey conducted by finance professors Paola Sapienza at Northwestern University and Luigi Zingales at the University of Chicago.

A recent study commissioned by the Mortgage Bankers Association likens the rise in strategic defaults to a spread of a disease. The longer the housing crisis goes on, the more other home owners will be tempted to walk away, the study says. "As fundamentally social animals, humans consciously (and subconsciously) look to their peers when forming opinions, habits and behaviors," according to the report.

Strategic default has come down to an ethical question for some home owners. 

"Guilt and morality are one side, and objective financial analysis are on the other side," said David Martin, 68, who has considered walking away from a Seattle condo he owns with his wife because the condo is about $60,000 less than the balance on their mortgage. "They're coming to two opposite conclusions. I wonder how many other people are struggling with the same question." Martin and his wife have decided to stick it out, however, hoping for a rebound in housing prices in 2013 as they continue paying their mortgage. 

But other home owners weighing the question are not always reaching the same conclusion. 

"It's a looming problem that's in the shadows," Jason Kopcak, a mortgage trader at Cantor Fitzgerald, told MSNBC.com. "It's very worrisome to mortgage lenders."

Strategic defaulters who walk away from their property, however, may have more to worry about than the morality and ethics of their action, though. They’ll face a blemish to their credit score, and in some states, lenders may still be able to pursue them in court in what’s known as a “deficiency judgment,” in seeking a full repayment of the mortgage balance. 

Source: “As Home Prices Fall, More Borrowers Walk Away,” MSNBC.com (Jan. 9. 2012)

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