The L.A. Times has an interesting article
about people with excellent credit scores who default on their mortgages. These are not people who can't pay their mortgages because of job loss or medical bills. This class of defaulters are sophisticated borrowers with prime credit. They know that defaulting on a mortgage will ruin their credit for ten years, but they see it as a business decision that's worth it when their houses become less than what is still owed to the bank. A new study found the following:
-- The number of strategic defaults is far beyond most industry estimates -- 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year's fourth quarter.
-- Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they've fallen behind on other accounts.
-- Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.
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-- Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: "Well, I'm $200,000 in the hole on my house, and yes, I'll damage my credit," he said of defaulters. But they see it as the most practical solution under the circumstances.
Strategic defaulting on mortgages is nothing new. Experts say that this new study by Experian-Wyman is going to be used by lenders to deny mortgages to people with perfect credit on the grounds that they might default. The mortgage lending world has truly gone nuts.
