Thursday, December 17, 2009

Strategic defaulting on mortgages

A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a "strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

Driving this phenomenon is the rising number of households that are deeply "under water," owing much more than the current value of their homes. First American CoreLogic, a real-estate information company, estimates that 5.3 million U.S. households have mortgage balances at least 20% higher than their homes' value, and 2.2 million of those households are at least 50% under water. The problem is concentrated in Arizona, California, Florida, Michigan and Nevada.

Notice how the banks frame this as a moral issue for homeowners. Isn't that rich? Bankers with morals? Since when?

Has any bank shown any morality at all in this financial crisis?

How about Morgan Stanley? Where is their "moral" obligation? Didn't they just give back 5 office buildings to the lenders that they bought from Blackstone in May of 2007? At the top of the commercial real estate market?

So the question for the homeowner really is, "How much would you pay for good credit?"

If that number is less than what you would save by walking away, you are then a candidate for a strategic default.

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