Daily News Article Strategic Default Study
June 24th, 2010
The results of a survey conducted by analysts at Morgan Stanley found an increasing share of defaults by homeowners who walk away from their mortgage payments even if they can afford their payments.
Homeowners who decide to walk away from their mortgages even though they can still afford their payments account for an increasing share of defaults, a new study found.
About 12% of all mortgage defaults in February were so-called "strategic" ones, up from 4% in mid-2007, according to research analysts at Morgan Stanley .
The analysts classified a default as strategic only when homeowners who hadn't been delinquent previously were making on-time payments one month, then skipped them for the next three, even while staying current on other debts of at least $10,000.
Locally, there are fewer strategic defaults compared with other markets. From 2004 through early 2010, just 2% of all defaults in the state were voluntary, compared with California, where an astonishing 47% were strategic, according to the Morgan Stanley report.
Borrowers are more likely to stop paying their mortgages if they have relatively high credit scores, but their housing debt is a high percentage of what their homes are now worth, the analysts said.
Last month, the Obama administration said it would adjust its anti-foreclosure program to encourage reductions to borrowers' principal amounts, instead of just the payments they make, to address the issue.
That change "gives us hope that policymakers are serious about curbing future strategic defaults," the Morgan Stanley analysts wrote.
Mortgage-bond analyst Laurie Goodman has said there will be as many as 12 million foreclosures over the next few years unless lenders can effectively modify borrowers' debt.
A fifth of U.S. homes carrying mortgages were worth less than their loans in the fourth quarter, according to real estate Web site Zillow.com.
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