Five Million Homeowners Underwater. How Many Will Walk Away?

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It is estimated that by June, about 10% of all homeowners with mortgages will owe more than their homes are worth. With strategic defaults on the rise, many homeowners who actually do keep paying the mortgage each month are increasingly feeling like suckers. Are we headed for a mass default?

From the NY Times:

The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

Those figures are bound to be much, much higher for 2009, the year when everything really went to hell. And, since a sense of morality and social pressure has thus far made many homeowners inclined to keep up with their payments, what happens as strategic default becomes more widespread, and more acceptable?

We may soon reach a tipping point, especially in places like Florida and Arizona where the home market fell off a cliff, when people stop feeling bad about walking away from their homes and start feeling like fools for owning up to their promises and continuing to pay the bills.