While there is talk that the economy might be improving, the housing market continues to struggle. Homeowners are acknowledging the fact that they are in over their heads by walking away from their homes.
“Strategic default” is the term used to describe a homeowner who has the ability to pay the mortgage payment, but instead stops payment and leaves the home to the bank.
Often the rationale behind a strategic default is that the home is worth less, often substantially less, than the mortgage. For some families, the mortgage can be as high as $400,000 for a home that is only worth $85,000. Other homeowners are unwilling to pay the balloon payment associated with an adjustable rate mortgage (ARM). When the large payment comes due, the homeowner instead opts for a strategic default.
The decision to stop paying the mortgage is usually rooted in the notion that it is easier to stop paying than continue to throw money at a loan that no longer represents the value of the house. While homeowners who choose to stop paying their mortgage will take a hit to their credit score, for some it is more important to keep their money than continue paying the bills.
Strategic Defaults by the Numbers
According to CoreLogic, more than 11 million Americans are underwater on their home. Estimates show that number could double in the coming months. The states most affected by strategic defaults are the same states with high numbers of foreclosures — Arizona, California and Florida.
CBS news reports that in Arizona, 50 percent of homes are underwater and in Nevada that number is even higher at 65 percent. With the value of houses rapidly diminishing, many homeowners saw a significant loss in equity and are unable to refinance to reflect the decreased home value.
The Commissioner of the Federal Housing Authority, David Stevens, said that this level of crisis in the housing market has not been seen since the Great Depression. In an effort to slow the rate of home foreclosures, the Obama Administration has set aside billions to incentivize banks to work with homeowners. Thus far, banks have generally been reluctant to renegotiate the terms of mortgages.
But for the large numbers of homeowners who owe more than their house is worth, the incentives are not enough to dissuade them from pursuing a strategic default. “The decision to walk away from the sinking home, by people who can afford to pay, is spreading like a virus,” Stevens said.