Strategic Defaults Are Going Mainstream. Shameless.

by Darwin on May 17, 2010

The Term Strategic Default is “the new black” in the world of homeowners who bought in to speculative real estate markets with the bare minimum down payments during the real estate boom.  These are homeowners that are well-paid, employed and completely capable of paying their mortgages, yet they’re walking away from their homes and their debt obligations because it is a “strategically” sound financial decision in their eyes.  While this behavior may make it more difficult for them to buy a house in the future, they view it as a means to saving (or not losing additional) tens of thousands to hundreds of thousands of dollars and home prices in their areas continue to implode or stagnate.  A strategic defaulter is commonly considered someone who is continuing to pay their other bills like car payments and credit card bills, yet they abruptly stop paying their mortgages.

Ethical? Make ‘Em Pay?  You Be the Judge

Opinions abound over the ethics of walking away from a mortgage obligation when you clearly have the ability to pay.  After all, if you’re paying off unsecured credit and not paying for the roof over your head, you’ve clearly made a choice.  From the standpoint of lenders, neighbors and to some degree, taxpayers, they’re all getting the short end of the stick while the strategic defaulter cuts their losses.

  • Banks are now having to deal with a huge capital loss and must attempt to resell a house in a market that’s already imploding.
  • Neighbors are seeing their real estate values suffer because every foreclosure that goes on the market bodes poorly for future sales.  Prospective homeowners that see 3 foreclosures on a block have to really wonder what they’re getting into.  Also, many of these homes end up being left in terrible condition given the owner’s lack of interest in maintaining the home.  And finally, once someone sees others engaging in this game, they’re more likely to follow suit.  This is the herd mentality at work.  The tendency to rush for the exit and seek safety or protection are primal instincts that manifest themselves in financial markets all the time (ever notice all the massive selloffs we see in the stock market, but you rarely see massive up days?  It’s much more compelling to run AWAY from danger than TOWARD a gain).
  • Taxpayers have already taken a haircut on all the various failed schemes the administration has come up with to keep people in their houses.  Well, actually, we started off with paying to keep people in their homes by subsidizing mortgage modifications with taxpayer dollars, and now they’re paying for people to leave their homes in an orderly fashion.  Regardless, we’re all paying for it, and the best is yet to come.  If this trend continues, the administration will likely feel even more compelled to meddle in the free markets even more and push more taxpayer dollars down the drain.  There’s an election coming up after all and a strategic default trend pushing home prices lower again and double-dip recession don’t bode well for mid-terms.

Their Retort?

To these complaints, many defaulters are saying the banks created this mess to begin with and they’re just big greedy corporations that would do the same thing if they could.  To the neighbors, they’re saying that while they may feel bad for those staying behind, they’ve gotta look out for themselves.

On both of these fronts, they’re full of it.  First of all, were banks kicking people out of their homes and reselling them for profit when home prices doubled in 7 years?  I don’t think so.  I know, they couldn’t.  But the reality is banks were honoring their lending commitments.  Just like banks don’t get to give you the boot and resell your house when prices go up, homeowners shouldn’t be able to cut bait and run when home prices go down.  You’re supposed to buy a home and live in it, not flip it.  And now each family that made a lousy decision is impacting a network of other neighbors, taxpayers, banks and local businesses.  Many of these strategic defaulters have also caught on that banks are not aggressively forcibly evicting deadbeats.  So, not only do they stop paying their mortages and cut the financial obligation cord, but now they’re squatters living in the bank’s home for 1-2 years or more until the bank finally enforces their rights.  These anecdotal accounts are all over from news reports to blogs to comments from frustrated homeowners who are sticking it out in their neighborhoods seeing perfectly capable people defaulting strategically.

What I found to be particularly frustrating during some of the interviews I’ve seen is that some of these homeowners have no compelling reason or need to leave at all!

  • They are employed
  • They were current on their mortgage until the decided to walk
  • They are staying in the area
  • In some cases they are extremely well-off
  • But they’re strategically defaulting because the house is “losing money”.

In a recent 60 minutes segment, there’s a guy who’s gotta be in his 60’s who bought a house for over a million dollars.  He admitted he loves the house.  But he’s looking to walk away because it’s worth so much less and he has to think about resale.  Why?  Just live in the damn house!  I don’t get it.  At that point in your life, do you really need to be running around flipping houses and worrying about resale value?  Just retire in your dream home, pay the mortgage payments that you can afford to and stop screwing people!

Some say that the stigma of having your house foreclosed on is no longer what it used to be and Americans are no longer ashamed of doing so.  Well, a lot of shameful and ridiculous behaviors no longer carry the same stigma they used to before reality TV, sending pictures of your genitals on cellphones and posting absurdly personal information on Facebook and the like, but that doesn’t make it acceptable.  Now, while you might be saying I’m overly judgmental for someone that’s not in that situation, I would never BE in that situation.  Think about it.  Living in a house with my wife and kids where any day we could be evicted because I just stopped paying my mortgage?  Looking at my neighbors sheepishly after I stopped paying my bills while they are current?  Freeloading in a house because I know banks are slow to move on evictions and gun-shy from all the bad press they’re getting from Congress and activist groups?  Shameless.

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