Housing: Could Strategic Default Turn Into a Full Blown Movement?

by: The PolyCapitalist

By now many people are aware that the housing sector is showing renewed signs of trouble.

In May, traditionally a time of the year when home purchasing activity picks up, both existing and new home sales tanked. And this is happening in spite of the fact that mortgage rates are at their lowest point since the 1950s.

Nearly one in four homeowners is "underwater" on their mortgage, meaning they owe more money than their home is worth. As detailed by the New York Times more and more homeowners are electing "strategic default", which is when a home owner quits making his/her mortgage payment even though s/he has the financial means to continue paying.

Not surprisingly, the ethics and morality of strategic default has become a hot media topic. Among others, Roger Lowestein in the NY Times and Dylan Ratigan of MSNBC take on this question and basically conclude that yes, it's ok for homeowners to walk away from their mortgages.

What would happen to the housing market if strategic default grows into a widespread phenomenon? Fannie Mae (FNM), not wanting to sit around and find out, yesterday announced that it was going on the offensive against strategic defaulters. Anyone that walks away from a mortgage that can still afford to pay will be locked out of the mortgage market for seven years.

Even with Fannie's move it's quite possible that strategic default will continue to gain momentum. Many homeowners are unlikely to sit idly by while their neighbors walk away from their underwater mortgages.

But one thing is certain: if strategic default becomes a widespread trend then a double dip in housing prices has moved a lot closer to becoming a done deal.

Disclosure: No positions