Strategic Defaults Comprised 31% of Q1 Foreclosures

A quarterly survey by two Chicago professors shows a dramatic increase in the number of "strategic defaults" where an underwater homeowner willingly defaults on his mortgage even though he can afford to make the payments. An estimated 31% of foreclosures involved strategic defaults in March, compared to 22% a year ago, according to the Chicago Booth/Kellogg School Financial Trust Index. The survey is conducted by professors Paolo Sapienza of the Kellogg School of Management, and Luigi Zingales of the University of Chicago Booth School of Business. They said the likelihood of strategic default increases by 23% if a homeowner discovers that a neighbor with negative equity received loan forgiveness from their servicer. The likelihood increases to 29% if homeowners can find alternative financing for a new home. The survey found that 56% of homeowners do not believe that lenders will come after them if they walk away from their home. "With more and more homeowners believing that lenders are failing to pursue those who default on their mortgage, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford the payments," Sapienza said.