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Mortgage defaulters have good credit

Scott Jagow Sep 21, 2009

A new study suggests many people who are walking away from their mortgages know exactly what they’re doing. They’re not especially desperate. They’re not subprime borrowers. They’re just making a business decision.

From the Los Angeles Times:

Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to “strategically default” — abruptly and intentionally pull the plug and abandon the mortgage — compared with lower-scoring borrowers.

The study says “strategic defaulting” is far more common than the real estate industry estimates. A couple of other facts:

Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they’ve fallen behind on other accounts.

Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: “Well, I’m $200,000 in the hole on my house, and yes, I’ll damage my credit,” he said of defaulters. But they see it as the most practical solution under the circumstances.

Can you guess where many of these strategic defaults are occurring?

California and Florida. In California last year, strategic defaults were 68 times higher than in 2005.

The study doesn’t go into the moral/ethical questions surrounding the practice of bailing on mortgages, but it does say lenders should try to spot these people and avoid offering them loan mods. They’d default on those, too. While strategic defaulting is a rational, legal practice, I’m sure it’s tough for the neighbors to accept.

But would they prefer this? From the Tracy Press in Tracy, California:

A husband and wife are suspected of burning down their $1 million home in Tracy last summer (for the insurance money) — a blaze that almost killed several firefighters.

Public record paints a picture of a couple so dependent on the housing market that they lost virtually all of their property wealth when the economy tanked. They let several properties lapse into foreclosure as their income as real estate agents and brokers suffered from a dearth of buyers.

Although the study doesn’t go into the ethical issues of strategic defaults, we can certainly do it here. You have any problem with it?

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