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Strategic Defaults - Do it at your own risk

I've been tracking strategic defaults for a while.   A good piece of news came today in a Wall Street Journal article (excerpt below):

'Strategic defaults are becoming more common, various studies show -- a Morgan Stanley report pegged them at 12% of all home-mortgage defaults in February, up from "insignificant levels" three years ago. Lenders fear borrowers who "walk away" will greatly increase the industry's foreclosure-related losses, which already total in the hundreds of billions of dollars.

In addition, growing social acceptance of this behavior could have ramifications not only for personal credit histories and the health of neighborhoods, but also for the future of mortgage lending, according to those studying the issue.

One possible reason the numbers are rising is some homeowners' belief that lenders aren't aggressively pursuing those who default, according to a report by the Chicago Booth/Kellogg School Financial Trust Index. "

Until the penalty of a strategic default is widely publicized, more "owners" will continue defaulting on their loans under the belief that a short-term credit score hit is the only recourse.   Only when strategic defaulting ends will the market begin the long process to clear of properties that will lead to a stable housing market. 



Disclosure: No positions.