Approximately one million American homeowners will strategically walk away from their mortgages this year. Why? They’re underwater on their mortgages, and the rental market is so cheap that they can live large by paying a landlord instead of a bank.
Apparently, the controversial advice of a University of Arizona professor who wrote a paper recommending that underwater homeowners simply walk away from their mortgages resonates with a lot of people. Credit score, shmedit score. Ethics, shmethics. You can worry about all of that later.
The WSJ profiles some of this year’s one million or so strategic defaulters—more than four times the number of such defaults in 2007—while framing the situation as one in which the American Dream is morphing: Renting, in many ways, is now preferable to owning. No real estate investment, but no worries about feeling trapped by the unpredictable housing market either, and best of all: Since renting is cheaper than paying a mortgage, you’ll have extra money to spend however you please.
The most interesting family profiled is the Richeys. (And yes, that’s their real name, though Dickens couldn’t have come up with a better one.) They had a $430,000 mortgage, with a monthly payment of $3,700, on a home that decreased in value by about $200,000 in 2009. The family of five pleaded with their bank for a mortgage modification, and was eventually approved for a new monthly payment of $3,300. The family turned down the offer and moved into a rental home—one much bigger and nicer than the home they’d bought, with a waterfall-laden pool and monthly rent of just $2,195.
With the money they saved on their monthly housing expenses, the Richeys, who live in southern California, bought season passes to Disneyland, and plan to go on a cruise to Mexico in early 2010.
Does anyone see anything wrong with this?
Well, yes. Actually, one of the Richey’s neighbors, a gentleman named Tom Sobelman. His argument, via the WSJ:
He’s still paying the mortgage on an investment property he owns nearby, despite the fact that the rent is about $1,000 a month short of covering his costs.
Mr. Sobelman, 37, argues that people who choose to default are unfairly benefiting at the expense of taxpayers, who have put trillions of dollars at risk to bail out struggling banks. “All these people are gaming the system, and I’m paying for it,” he says. “My kids are going to be paying it off.”