Two years ago, a national debate raged regarding strategic default: Was it wrong to walk away from one’s mortgage? Or, when a homeowner is underwater—owing more than the home was worth—is it a purely business situation in which concepts of right and wrong just don’t apply? Some homeowners dutifully kept up with their mortgage payments. Some cut their losses and walked away. Which was the smarter way to go?
A New York Times story offers two typical examples of homeowners who bought in the mid-’00s, then walked away from their mortgages a couple years later after seeing the value of their properties plummet during the recession. Naturally, the homeowners stressed over such a big, worrisome decision, but now, they look back and see that the made good calls, given their situations.
What kind of consequences have these two strategic defaulters faced since walking away? Pretty much nothing unexpected of consequence, they say. Their credit scores took a beating, but it’s not like anyone with a clue would expect otherwise. Buying a home anytime soon just isn’t going to happen, and getting access to credit (for car financing, say, or just a new credit card account with a decent interest rate) is problematic. Surprisingly, though, YouWalkAway, the service that has guided thousands of homeowners through the strategic default process, says credit scores have actually been rebounding fairly quickly after all the paperwork for a foreclosure is complete—meaning defaulters’ scores started rising within months afterward, not the years many predicted it would take.
Most importantly, because the two homeowners here lived in California and Oregon—”nonrecourse” states, where banks cannot take defaulters to court for mortgage debts—there are no worries about lenders coming after them.
The traditional consensus has it that paying one’s mortgage is the responsible thing to do. But bearing mind the stagnant real estate market, the likelihood that it will take decades before certain homes seem like halfway decent investments, and the absence of any truly worrisome consequences, continuing to pay one’s mortgage through the doldrums of 2009 and 2010 would have been, from the purely business perspective, foolish, not a sign of responsibility. The MBA types probably would call it fiscally irresponsible, in fact.
More and more over the past few years, it seems as if homeowners understood that the housing market wasn’t going to recover anytime soon, and that the best strategy for many would be strategic default. One study indicated that 35% of mortgage defaults were strategic as of last September, compared to just 26% of mortgage defaults in March 2009.
How does all this strategizing play out across the nation? Obviously, strategic defaults raise the overall number of foreclosures, and a USA Today story brings to light how big the foreclosure backlog is in the U.S. right now: At the current pace, it would take more than 50 bureaucracy-clogged years to process and sell all the foreclosures in New York, New Jersey, and Washington, D.C. Those spots are the worst of the worst, though about half of the states will need eight of more years to get all of the foreclosures ready for sale.
What does all of this do to the housing market? On the one hand, keeping the foreclosure sales to a trickle helps avoid a glut of distressed homes from being on the market; if that happened, housing prices would decrease quickly and sharply because of excess supply and not enough buyers. On the other hand, all of these homes—2.1 million in foreclosure or seriously delinquent with mortgages—aren’t exactly helping to speed along a recovery in the housing market either.