Shadowing Strategic Default

Strategic default is a national epidemic and as an increasing number of borrowers face owing more on their mortgage than what their home is worth, more and more are considering the option of walking away from their homes. The servicing world is trying to find a solution to the problem. But traditional loss mitigation efforts are so far, unsuccessful, and the industry is looking outside the box. An emerging trend on that front is the concept of equity sharing. Proponents of the solution claim it can stop strategic default without the moral hazard of unearned principal write downs, while critics call it a gimmick. According to a recent Fannie Mae housing survey of more than 3,400 Americans, underwater borrowers show a greater tendency toward loan delinquency. In addition, a second poll by market research firm Harris Interactive found that nearly one-quarter of borrowers surveyed believe they are underwater. According to the Fannie poll, two-thirds of respondents prefer owning to renting, even while the nation is recovering from a recession and faces declining home values. But that doesn’t mean that borrowers aren’t finding ways to justify strategic default. A contagion effect within communities is leading borrowers to consider default as an acceptable option in the face of financial hardship, Fannie found. Delinquent and current mortgage borrowers are more than twice as likely to consider not paying their mortgage if they know someone that defaulted. But thinking about walking away and actually doing it are two different issues, according to Kathleen Day, a representative at the Center for Responsible Lending. “From everything we know, no one defaults if they could possibly stay in their homes,” she told HousingWire. “We just don’t see people responsibly walking away. It’s people who are at the end of their economic rope.” TO READ THE FULL STORY, SUBSCRIBE NOW.