Friday, September 25, 2009

Strategic Mortgage Defaults

The L.A. Times reports that a study shows borrowers with good credit are actually more likely to default on their mortgages than borrowers with lower credit scores. These "strategic defaults" appear to be done based on a simple business analysis and with full knowledge of the consequences: if the property is seriously underwater, just give it up.

When I first read this, my thought was the defaulters were mainly people who bought investment properties during the bubble and were now giving up This does not appear to be the case, however. "Two-thirds of strategic defaulters have only one mortgage -- the one they're walking away from on their primary homes." And, not surprisingly, the study found "Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006."

One site I was reading opined that this would make loan modifications harder to obtain. But I'm not sure that is a bad thing. A report published in April showed "Fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent... [while] nearly one in four loan modifications in the fourth quarter [of 2008] actually resulted in increased monthly payments."

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