Eighty-two percent of people in a recent survey think it’s morally wrong to go through with a strategic default, in which homeowners who can afford to make their payments make a decision to stop making them and let the bank repossess their home. Seventeen percent of foreclosures involve these strategic defaults, usually prompted when the homeowner loses faith that their underwater home will recover its lost value anytime soon.
Strategic defaulters have been seen as everything from deadbeats to financially courageous Davids facing down the banking Goliaths. But at least one industry now sees strategic defaulters from a novel point of view: as a target marketing demographic.
An AdAge article covering new data from Experian exhorts marketers to pay attention to strategic defaulters as a “newly trending consumer segment,” best understood and targeted by marketers through the lens of the group’s tendency “to become a strange new class of renters” that behaves counter to the conventional wisdom about their demographic.
This group, AdAge explains, turns the deadbeat stereotype on its head, starting with much higher-than-average incomes, a tendency to own multiple homes, and an inclination to stay current on all their bills but the upside-down home loan.
They also go against type by going from owning to renting, which frees up income these consumers can use to buy lots of other things in the credit-challenged years that will follow the foreclosure. In fact, because lenders can take as long as two years after the first missed payment to foreclose, the article encourages marketers to view strategic defaulters as being in a strong financial position, coming off of two years of living in their homes, mortgage-free.
It is an intriguing thought, the idea that the very strategic defaulters so many decry as perpetuating the snowball effect of declining home values might hold the keys to the coffers of disposable income that, if spent, would snowball the recovery.
But the conception of strategic defaulters as ready, willing and able to buy iPads by the dozen misses the essential nature of strategic default as, well, strategic. That’s because strategic defaulters tend to hold on to their cash because they know they may need it, given their impaired credit. Also, investors over-index as strategic defaulters, many walking away from rental homes to cut their losses and save their primary residences. So fewer strategic defaulters are likely to be the mortgage-free, big spenders than one might expect.
More importantly, to the extent anyone is targeting these folks, it should be their own mortgage lenders, targeting them for modifications and principal writedowns. Studies show homeowners would rather stay than walk away, even when a home carries significant negative equity. But they feel forced to walk away when increasing negative equity collides with bank inflexibility.