Years ago, homeowners viewed foreclosure as a last resort – after all other means had been exhausted to save the home. Homeowners were often embarrassed that they had to take this route.
Today, times have changed and, according to a recent study, homeowners find it more socially acceptable to hand over the keys and walk away from their debt.
A recent study, by ID Analytics (a consumer identity insight group) and research firm JZ Analytics, shows that 32 percent of U.S. adults say that homeowners should be able to strategically default on their mortgages without any consequences. The report also said that 13 percent would do so if they needed.
Rick Sharge, executive vice president of Carrington Mortgage Holdings, LLC in Santa Ana, Calif., says there are a number of reasons why more Americans find it acceptable to strategically default on a home loan. “While foreclosure used to be hidden, and something that carried a stigma, it’s now a relatively common event,” he says. “Almost everyone knows someone who’s been foreclosed on or been in foreclosure.”
The reasons for foreclosure have evolved as well. Sharge says, “In other cases, the reasons are more personal. For many, it’s a practical economic consideration. In markets where home prices have dropped by 50 to 60 percent since the peak of the market, borrowers may decide that they’re never going to get back to a break-even point, much less build equity in their home, and they’re better off taking a short–term hit to their credit score.”
Matthew Hars, managing director of Varick Capital, a real estate advisory and investment firm, and Manhattan Spaces, a residential broker in New York, says that one reason for the increased acceptability of strategic default is consumer distrust.
Consumers have developed a deep resentment of financial institutions, he says, which they perceive as not dealing in good faith with distressed borrowers. “In this case, the rationale is that it’s okay to default if a lender won’t work with a borrower to right size a loan that’s upside down,” Hars says. They think “it’s the lender’s fault, because of their refusal to write down some of the principal balance, which they’re going to have to do anyway in a foreclosure.”
If more Americans follow suit and there is an increase in the number of strategic defaults, there could be repercussions in the marketplace, according to Sharge.
“From a housing perspective, a large number of these defaults would put more distressed inventory on the market, which could have a negative effect on local home prices,” and it could get more difficult to get a mortgage, he says. “It’s very likely that higher down payments will be required, since the notion is that borrowers with ‘skin in the game’ will less likely walk away from a property. We might also see credit scoring modified to penalize borrowers who strategically default, since lenders will be disinclined to loan money to someone who purposely broke a contract.”
Still, the strategic foreclosure wave is mostly concentrated in Florida and California where there were large housing bubbles, Hars says. “This creates a lack of credit [in these states] for lending and fuels more purchases by investors, since they generally can purchase with cash instead of getting a loan.”
Times may be looking up, however. Based on information from the National Association of Realtors, 24 percent of respondents reported selling distressed property (foreclosed and short sales), down substantially from what had been the case a year or two ago. With the new year around the corner, the real estate market could hinge upon what decisions struggling Americans make.