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Strategic Defaults: Morally Repugnant or Sensibly Prudent?

In case you did not see it on the air May 9, 2010 there was a very good piece about strategic defaults, where people make the decision to walk away from their mortgage even though they can afford to make the house payment.

A new study out by Brent White from the University of Arizona, Walking Away: The Emotional Drivers of Strategic Default, takes a look at the reasons why and logic people use to decide that walking away from their homes is a good idea. He presents some very interesting research and points in his extensive paper.

  • “it’s important to address one popular misconception about the cause of the apparent trend toward increasing strategic default: namely, that the social and moral constraints against defaulting on one’s mortgage have begun to give way and thus people no longer feel guilt or shame when defaulting.

    As an initial matter, the suggestion that the social norm against defaulting on one’s mortgage has weakened is belied by surveys showing that it remains strong and, if anything, may be getting stronger.”

  • “Rather, many strategic defaulters feel great anxiety about their financial situation, are overwhelmed by a sense of hopelessness, and are angry that their lenders and the government have refused to help. These emotions drive them to default.”
  • “…the elderly, the highly-educated, and those with high credit scores are among the most likely to strategically default.”
  • “In contrast to individuals with good credit scores, studies have found that low-income homeowners with poor credit scores are less likely to strategically default – despite the fact that they might have the least to lose in terms of damage to their credit scores or the risk of a deficiency judgment by letting go.”
  • “…people are much more likely to default strategically if they know someone else who has done so.”
  • “…homeowners considering strategic default report feeling “stressed,” “agonized,” “overwhelmed,” and trapped. They also describe feeling as though they are “fighting a losing battle,” “sinking lower and lower,” throwing their money down a hole, and fighting for their lives. Moreover, the strategic defaulters who shared their stories struggled with these feelings for quite some time before making the decision to stop paying their mortgages.”
  • “Many underwater homeowners who seek help from their lenders, however, are turned away at the door. As one homeowner explains, “I called my lender and ask if I could discuss a loan modification and they said absolutely not.” Lenders give numerous reasons for this, most commonly that homeowners are current on their mortgages.”

The fact being a “responsible” borrower is the surest way not to get a loan modification can be a rude awakening for many homeowners. It can also be a first push toward strategic default.

  • “The emotional impact of being flatly refused help, or learning after months of waiting that the initial hope was false, is enough to push many underwater homeowners from a state of anxiety to a state of despair.”
  • “After all the guilt, anxiety, despair, and anger, the actual act of strategic default brings many underwater homeowners a sense of empowerment.”


READ  We Gave Our Home Back in a Strategic Default But Have Some Residual Debt. - Marilyn



About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

1 Comment

  • We walked away from an underwater house in a bad neighborhood w/bad schools that don’t have much chance of getting better in the next 20 years – when we may or may not be “even” on our mortgage. We actually filed bankruptcy and are including that so I’m not sure if that’s still considered one of the strategic defaults, but it’s helped us move into a nice neighborhood where our daughter can grow up and get a decent education. Good Luck!

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