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Mortgage Mess

Why the rise in ‘strategic’ defaults?

Jeff Tyler Apr 30, 2010
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Mortgage Mess

Why the rise in ‘strategic’ defaults?

Jeff Tyler Apr 30, 2010
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Tess Vigeland: If you haven’t yet signed on the dotted line to buy a house, you will have to do it without Uncle Sam’s help. The homebuyer tax credit expires today. Gotta have a contract in hand. But there is also news today on the other end of the market. A new study finds a spike in the number of so-called “strategic” defaults. Also known as walking away from your mortgage.

Marketplace’s Jeff Tyler has more on what’s behind the willingness to just hand the keys to the bank.


Jeff Tyler: The Financial Trust Index is a quarterly snapshot of just that — our collective trust in the nation’s financial system. The study found that the number of strategic defaults rose to 31 percent of all U.S. foreclosures in March. That’s up about 10 percent from a year ago.

Paola Sapienza: It’s a little bit like a contagion effect, like a disease.

That’s Northwestern University finance professor Paola Sapienza, who co-wrote the study. She says people consider more than their bank balance when thinking about defaulting on a home.

Sapienza: Do I have to move my kids to a different school? Do I lose my friends because they are looking at me in a way that I don’t like that, so here is the social stigma.

But Sapienza’s research found that fear of social stigma is eroding.

Sapienza: If everybody else is doing it, then it may become more acceptable, socially.

Overall, foreclosure activity is up about 16 percent compared to the same time last year.

Rick Sharga follows foreclosures for Realty Trac. He’s noticed what he calls a new mentality.

Rick Sharga: I think we’re looking at a different social construct than what we’ve seen historically, where your home was your castle and you would fight just about to the death to do anything you could to avoid losing it.

He says we could see another avalanche of foreclosures begin this summer, as adjustable loans reset at higher rates. In psychological terms, those higher rates could help borrowers rationalize defaulting on a home.

I’m Jeff Tyler for Marketplace.

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