Chicago Relocation

Where do you stand on strategic defaults?

July 25, 2012

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John D’Ambrogio

It seems one of the buzz-phrases I heard a lot in 2011 and will surely hear in 2012 is “Strategic Defaults (SD).”  By now you’ve surely heard of a strategic default – In essence, where a homeowner who can afford their mortgage chooses instead to stop paying on it, and is willing to “take the hit” on their credit as opposed to paying on what they consider an investment gone bad.

A quick google search of the phrase brings page one results (which I will not promote by linking to) including web pages promising help for homeowners who are consider a strategic default, including such pithy headers as “strategic default v. moral obligation” and “quit feeling bad for the banks.”  Or there’s “How to strategically default and make life miserable for the banks.”  Wow.  Sounds like the seeds of an “Occupy (insert mortgage company name)” offshoot. The “Joanie loves Chachi” spinoff from “Happy Days.”  I hope they bring drums.  I love drums.

My professional colleague Steve Harney has a number of great posts on this topic at his blog – (Keeping Current Matters), including “Will Falling Values Lead to More Strategic Defaults” which provides some pretty startling stats from FannieMae, including the fact that  ”The number of underwater homeowners who believe it is okay to default on your mortgage if you are under financial distress has almost doubled in the last twelve months (14% to 27%).”  So not only do we have more people under water (the audience for a SD) but twice as many think it’s OK!

And in his article “One Thing That Still Concerns Us” Steve discusses a related factor – Consumer Confidence – That has the ability to further push SDs “mainstream” while causing further delays in the housing market.

Personally, I understand the professional logic of “cutting bait” when an investment has gone bad.  But to stop owning (i.e. selling) your losing shares of ABC widget company because they have less value than when you bought them is not the same.  Why?  Because you didn’t borrow the money (hopefully) from ABC to purchase their stock, which is what you do with a mortgage.

Shame on the banking system for going along with the over confidence of the real estate bubble, and turning a blind eye when they should have been a bit more parochial us? Sure.  Government intervention to force the re-working of loan terms?  Well, that’s a point one can argue.

Let people walk away from debt that they signed their name on?  I can’t agree with that.  What do you think?  Maybe we’re all in it together, because when one person defaults, we all pay.  Reminds me of a poem.  Ask not for whom that bell tolls…

It tolls for thee....




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