A Closer Look at Strategic Defaulters

The Washington Post has an interesting — and not very surprising — article on Strategic Defaulters. It is based on a study by researchers from the European University Institute, Northwestern University and the University of Chicago.

The key data point:

“[Estimates are] that 35% of defaults in September may have been strategic, up from 26% in March 2009. But they acknowledge in a report published last month that the numbers are tough to tease out because “strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,” according to the report…”

In other words, they really do not have much of a clue as to what the actual numbers are.

What we do know is that whenever mortgage borrowers are more than 25% upside down — when the home is worth only 75% of the mortgage amount owed — strategic defaults and walkaways go up dramatically in numbers:

“This relatively new type of behavior is the latest sign of just how profoundly the mortgage crisis has reshaped consumer attitudes toward their homes and their finances. It is largely driven by plunging home values, which have left nearly a quarter of the nation’s homeowners underwater, or owing more on their mortgages than their homes are worth.

So some do the math and walk.”

By “relatively new type of behavior,” I assume they mean years and not decades old.

One thing that is peculiar: I do not get the impression that the authors of the study really understand what the word STRATEGIC means:

“A growing body of research shows that these so-called “strategic defaulters” defy the tell-tale characteristics of most people whose loans go bad. They pay their bills on time, rarely exceed their credit-card limits and hardly use retail credit cards, according to a study released Thursday.

And they plan ahead.

They know their credit scores will take a hit after they fall behind on their mortgages, so they tend to open new credit cards in advance of defaulting, according to Thursday’s study, conducted by FICO, the firm that created the nation’s most widely used credit scoring system.

“These are savvy people who organize themselves,” said Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.”

In other words, these strategic defaults are (duh) done strategically and are not due to insufficient monies. (Those might be called “financial defaults”).

Geez, academics can be pretty clueless sometimes . . .


Wealthy: Most Likely to Walk Away from Underwater RE (July 9th, 2010)

Mortgage Bankers Association “Walks Away” from HQ (February 7th, 2010)

Strategic Defaults in Florida (October 28th, 2009)

Strategic defaulters’ pay bills on time and plan ahead, study finds
Dina ElBoghdady
Washington Post, April 21, 9:22 PM

See Also:
Builders of New Homes Seeing No Sign of Recovery (NYT)

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