Strategic defaults — where homeowners choose to walk away from underwater mortgage obligations regardless that they have the ability to pay - is rising. Two recent studies, one from academia and one from an investment bank, find differing levels of homeowners walking away from their homes.
Strategic defaults account for more than one-third of all defaults, according to research released by the University of Chicago Booth School of Business and the Kellogg School of Management.
The study by Morgan Stanley finds a lower level of strategic default, with 12% choosing not to pay their mortgage.
The share of mortgage defaults perceived to be strategic, meaning homeowners that willingly do not pay their mortgage, grew to 31% through March 2010, from 22% a year earlier, professors Paola Sapienza and Luigi Zingales wrote in their report.
The research pointed to a growing perception that lenders are not going after borrowers who decide to walk away. In December 2009, the average survey respondent indicated they believe lenders are 56% possible to go after a borrower, compared with 54% in March 2010.
“With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments,” Sapienza said.
The results also indicate the likelihood of strategic default increases 23% if a borrower learns of an underwater neighbor receiving partial loan forgiveness. Additionally, strategic default increases by 29% if borrowers can find alternate ways to finance a new home.
Although separate research released Thursday by Morgan Stanley does not put the share of strategic defaults quite as high as the University of Chicago’s, their data shows the trend is growing significantly to about 12% of all defaults in February 2010.
Additionally, Morgan Stanley found that although the highest proportion of overall defaults is from the lowest credit score homeowners, strategic defaults are generally higher credit score borrowers in both earlier loans made in 2004 and more recent loans made in 2007.
Historically, unemployment, divorce, and heath issues, have been the top causes of default and foreclosure. Although the recession and the high unemployment rate cause many defaults and foreclosures, home equity as a result of home value has become the top cause the past couple years.
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