It is assumed by many that borrowers who default on their mortgages are low-income and purchased their home without being able to afford it by taking advantage of low interest rates and lax lending practices. Or that those borrowers signed mortgages without fully understanding the fine print. Or that they qualified for a loan based on no-documents or stated-income loan programs.
It is not necessarily true. Many stated-income borrowers happily meet their mortgage obligations.
At the same time, it is also true that many sub-prime loan borrowers defaulted on their mortgages.
However, a study of 24 million credit files by national credit bureau Experian and consulting company Oliver Wyman has shown that home owners with high credit scores are 50 percent more likely to deliberately walk away from a mortgage than lower-scoring borrowers.
The industry calls these “strategic defaults” and their numbers grew to 588,000 in 2008, double the total in 2007, and well beyond most earlier estimates.
The study determined:
- Strategic defaulters tend to go straight from paying their mortgages dependably to not paying at all.
- Strategic defaulters are heavily concentrated in negative-equity markets like California and Florida.
- Two-thirds of strategic defaulters have only one mortgage.
- Most likely to default are home owners with large balances and the highest credit ratings.
Clearly, strategic defaulters are sophisticated and look on the decision to default as a business strategy. They may find themselves $200K-$300K in the hole on their house, and choose to damage their credit rather than continue making payments to the lender.
Clearly it seems that most “strategic defaulters” look at a house purchase as an investment first and as a HOME a distant second – while most traditional home buyers purchase a house as a HOME first and foremost.
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This study certainly explains the relatively low rate of short sales being approved by the lenders – in order to qualify for a short sale, the sellers must prove hardship. Merely not being happy with the current housing market and the fact that the seller’s house lost value, or that the seller owes more than the house is worth, is NOT enough for the lender to agree to a short sale. A hardship letter proving inability to meet mortgage obligations due to circumstances beyond borrower’s control is the only way to qualify for a short sale.
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NOTE: I am a REALTOR who is also CDPE, Certified Distressed Property Expert. If you or someone you know owes more on their house than it is worth in the current market, and must sell due to relocation, job transfer, loss of income or other factors, you may qualify for a short sale and thus save your credit. Contact me personally for a no obligation consultation before you decide to foreclose on your home and damage your credit – short sale is not reported on your credit report.
I practice real estate in Northern Virginia area: Arlington County, Fairfax County, Fauquier County, Loudoun County, Prince William County.
SOURCE: Washington Post Writers Group
