When Good Loans Go Bad--Why Some Homeowners Walk Away

Posted by  on Oct 08, 2010

Current Mortgage Rates Save Many--But Not All

Current mortgage rates are low by any standard. And the fact that home loans are now so cheap has allowed millions of homeowners to refinance, saving some of them from foreclosure and possible ruin. Sadly, however, refinancing was not a viable option for everyone, and many still face losing their homes.

It's not hard to feel sorry for them, especially as debt counsellors say that many are in trouble not because of profligacy, but because they are struggling to cope with the effects of unemployment, illness, or divorce.

Strategic Defaulting

One group for which many find it difficult to find sympathy--though some admire its members' assumed astuteness--comprises those who choose to walk away from their "underwater" mortgages (when the outstanding balance of the mortgage is higher than the market value of the property).

This so-called "strategic default" route seems to be growing in popularity. A report published at the end of April by the Chicago Booth/Kellogg School's Financial Trust Index showed that, in March 2009, 22 percent of all foreclosures were thought to be a result of strategic defaults. In the same month this year, that proportion had jumped to 31 percent.

Judging Books

Many think of these strategic defaulters as being driven solely by cold calculation. They're widely perceived as choosing to stop making payments, not because they can't afford them, but because they decide that they'll make a buck by walking away.

But a new study, Walking Away: The Emotional Drivers of Strategic Default, published this month by Brent T. White, who's an associate professor of law at the James E. Rogers College of Law, University of Arizona, suggests that these perceptions may be wide of the mark. It says:

Negative equity alone does not drive many strategic defaulters' decisions to intentionally stop paying their mortgages. Rather, their decisions to default are driven primarily by emotion--typically anxiety and hopelessness about their financial futures and anger at their lenders' and the government's unwillingness to help.

When Mortgage Loan Difficulties Are Just the Start

Last Friday, the Wall Street Journal shed some new light on one reason why the government's Home Affordable Modification Program, which is supposed to help those in trouble with their mortgages, is still struggling to gain traction. It quoted a counsellor who said that 25-30 percent of those whose mortgages were modified last year are coming back because they have other debts that are weighing them down.

A U.S. Treasury report from March confirms the problem. The ratio of housing expenses (principal, interest, taxes, insurance and homeowners association and/or condo fees) to monthly gross income of those whose mortgages were modified dropped from 45 percent to 31 percent. However, if you add payments on installment debts, junior liens, alimony, car lease payments, and investment property payments then the ratio of those outgoings to monthly gross income is nearly 60 percent--frighteningly high.

Home Refinance Works

Keeping monthly outgoings to a minimum is arguably the most likely way to get through problems like short-term unemployment, illness, and so on. And the time to act to optimize those outgoings is before problems arise.

If you think that you could be paying too much each month for your mortgage, then your should explore your refinancing options right now. To begin, get home refinance quotes here.


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