What the research studies reveal about Strategic Default?

When the foreclosure problem is thickening by delinquencies of financially down home owners, there is also another phenomenon springing up recently. Those borrower-home owners, who can well-afford to pay the mortgage payments are refraining from doing so, on their own accord. These defaults are known as “Strategic Defaults” and are causing concern to the mortgage lending industry.

Several research studies have been conducted on the subject. Here are some results:

Experian and Oliver Wyman, a research firm in their analysis estimated that among the borrowers of home loan mortgages and were behind their repayment installments by 60 days, the so called strategic default was about 18%. In the year 2008, nearly 588,000 borrowers all over the country defaulted as a strategy, although they are affordable by them. Compared to the year 2007, they found this is a huge difference upwards by 128%.

Further, it was found out that in areas where the prices of properties experienced a steep decline – especially housing markets of California and Florida –  this practice of strategic default was most prevalent. And mortgage loans which originated in 2006 or thereafter, met with this type of borrower-home owners more, the reason being these people did not experience appreciation in their home prices, and they started dipping down.

Chicago Booth/Kellogg School Financial Trust Index collected data in their research, through a conducted survey of around 1,000 people related with mortgage home loans. According to the result, the percentage of home owners willing to default from their mortgage commitments strategically was rising. While this percentage was 31% in March this year, it stood at only 22% in 2009 March.

Interestingly, the co-authors of the research are reported to have attributed one possible reason for rising numbers of strategic default is – some distressed home owners’ belief – the mortgage lenders are not pursuing defaulters aggressively.

Another opinion offered by a spokesperson of Responsible Home Owner Reward, a program working with mortgage lenders in providing financial incentives for borrowers, who run the high risk of defaulting strategically is – people are learning and get emboldened that they have one or two years before being thrown out of a home by the lenders, after refraining from paying mortgages.

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