Strategic Defaults May Rise

Data shows Americans' trust in the nation's financial system is wearing off, increasing the likelihood more people will choose to default on their mortgage partly due to the perception that "lenders are not going after borrowers who walk away."

The quarterly Chicago Booth/Kellogg School Financial Trust Index shows "a marked increase" in the number of homeowners willing to default even if they can pay the mortgage if the value of their house is under water.

If in March 2009 only 22% of foreclosures were deemed "strategic," in March 2010 it increased to 31%.

Analysts say the trend is confirmed by survey findings indicating that while in December 2009 the average homeowner said the probability a lender will pursue borrowers who walk away was at 56%, by March 2010 that number dropped to 54%.

This change represents a risk that growing numbers of homeowners may walk away from their mortgage.

Other factors including new federal initiatives are negatively affecting borrowers. The likelihood of strategic default increased by 23% if homeowners learn their neighbor with negative equity in the house received loan forgiveness. That probability goes up to 29% if homeowners can find alternative financing for a new home.

Plus, despite improvements in the past few years in quality and frequency of communication between borrowers and their banks, the survey found that Americans' trust in the financial system has not improved. Instead it dropped by 2% compared to the last quarter to 23%.

Apparently borrowers make clear distinctions between housing and housing service providers.

Last month, Mike Williams, president and CEO of Fannie Mae, noted that findings show Americans continue to value homeownership and think about their homes in ways that go much deeper than the financial investment, "despite the recent downturn in the housing sector."

Fannie Mae's National Housing Survey published at the beginning of April revealed that most respondents, up to 88%, believe that walking away from an underwater mortgage is not acceptable. Yet, those who know someone who has defaulted are more than twice as likely to have seriously considered stopping payments on their mortgage.

"The public strongly believes in the importance of upholding the financial commitment involved in buying and owning a home, even during these challenging times when home values have fallen," noted Williams.

In fact even Americans underwater on their mortgages stated the Fannie survey they think it is not acceptable or OK to stop paying the mortgage. Nearly nine in ten Americans, including seven in ten who are delinquent on their own mortgages, do not believe it is acceptable for people to stop making payments on an underwater mortgage.

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