"Strategic Defaulters" - Savvy Homeowners Choosing To Cut Their Losses On Underwater Homes

The Arizona Republic reports:

• Many of the people who have been walking away from mortgages over the past few years don't fit the standard profile. Cash-strapped? Unemployed? Financially unsophisticated? Low-income?



• None of those descriptions seem to apply to most "strategic defaulters" - homeowners who have chosen to cut their losses on properties that dropped in value, just as they might sell an old car with mounting repair bills or dump stock in a company that just reported a loss.



• "Many are financially savvy people with higher credit scores and higher income," said Tracy Bremmer, director of decision analytics at credit-bureau Experian, which has studied the issue to help lenders identify people who might be default candidates. "They often own multiple properties, with larger original loan amounts."



• Strategic defaulters, in other words, seem to know what they're doing. In fact, they're often angling to buy the foreclosed home across the street at a bargain price before abandoning their own property, Bremmer said. "They'll open a new mortgage before defaulting on the existing loan," she said.

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• Defaulting on a loan - that is, missing payments - will hurt your credit score. But many strategic defaulters apparently don't worry about this or consider it a lesser evil. [...] Still, strategic defaulters tend to keep current on other obligations such as credit cards and auto loans. In fact, this tendency to keep making other payments is how Experian sorts out strategic defaulters from more distressed borrowers. "They're skipping out on their mortgages but paying everything else," she said.(1)

For the story, see 'Strategic defaulters' tend to be affluent, savvy homeowners.

(1) See Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis for more on the phenomenon of strategic defaulting:

• This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.



• Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision.



• Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.