Experian released numbers this week about a phenomenon in the economy that may be causing a delay in the recovery. It’s called Strategic Default or Voluntary Foreclosure, where the homeowner just stops making payments because they feel they can no longer afford the home.
According to Experian, in coordination with management consultants Oliver Wyman, about 588,000 homeowners “walked away” from their homes in 2008, double the numbers of that in 2007.
The number of borrowers who walk away from their homes is expected to increase as the amount that they owe becomes significantly more than what the home is worth. An estimated 16 million homeowners are currently underwater in their mortgage.
Numbers from Moody’s economy.com suggests that the number of underwater borrowers will spike at 17.4 million in the third quarter of 2010.
Though numbers from the Deutsche Bank make higher estimates, predicting in an August 2009 study that the numbers will grow from 14 million in 2009 to a staggering 25 million homeowners, or about 48% of all those with a mortgage, by the time home values stabilize.
Strategic Defaults have been the highest where home values have plunged the most, such as in California and Florida. In the Experian-Oliver Wyman study published in September, they stated these facts about the California Market:
- Strategic Defaults went up 68 times between 2005 – 2008
- Median Price for single-family homes fell from $522,670 in 2005 to $346,410 in 2008.
The study also found that borrowers with high credit scores when they applied for their loan, were about 50% more likely than other borrowers to strategically default only because they were underwater, regardless of whether they could afford to pay or not.
Borrowers who know another who defaulted are 82% more likely to do so themselves, or have the intention.
The mortgage division of Citigroup, reports that one in five borrowers who default do so willingly, even though they can pay the mortgage. They say that new government programs to curb the practice may be needed.
A study conducted by the University of Chicago, Northwestern University and the European University Institute, no homeowners would default if the shortfall in a home’s value was under 10%, though 17% of homeowners would default, even if they could afford to pay, when the home value reaches 50% that of what their home is valued at.
So what exactly is the impact to homeowners who strategically default?
- 100 points off your credit score
- Ineligible for mortgages for seven years
Though, while fifteen metro areas saw an increase in home values from July to August, those increases are nowhere near the huge losses that have already occurred to homeowners.
Analysts are concerned that the trend will continue, and that government intervention may be necessary.