Strategic defaults occur when financially distressed homeowners opt to walk away from their mortgage instead of choosing to pay the bills. Mortgage holders implement the move as they intentionally choose not to pay the debt to their lender and yet still manage to pay off other debt and outstanding bills instead.
According to the Wall Street Journal "A new report estimates that nearly one in five mortgage defaults through the first half of 2009 were 'strategic,' where borrowers who appeared to have the capacity to pay their mortgages stopped doing so." The move gained popularity in the states where the real estate market boom and bust cycles were the most extreme such as California and Florida.
Default Rates Increase in Exclusive Neighborhoods
What originally started as a trend in working class neighborhoods eventually spread throughout the communities of the suburban working class and lush neighborhoods across the nation. Los Altos, California is falling victim to the trend as recent reports show that five, million dollar properties are all being offered up in foreclosure auctions.
The foreclosure process legally mandates that information on foreclosed property auctions must be published in local papers. Ads for the foreclosed properties recently appeared in The Los Altos Town Crier, and the paper's Advertising Director Chris Redden has noticed the upturn in foreclosure auction section. Redden exclaimed that previously "it was a surprise if we had one foreclosure a month."
Underwater Mortgages and Strategic Defaults
Bloomberg.com reports that nearly one-fifth of the entire American homeowner population owe more on their homes than the current appraisal value. Even though many of them would like to take advantage of the low mortgage rates and refinance their mortgages, lenders refuse to deal with underwater properties.
The business acumen of the wealthy may contribute to a spike in strategic defaults. Presently there are around 11 million homeowners that are underwater on their mortgages. Mortgage lenders are holding their breath to see how the current housing double dip trend in the housing market is going to impact the industry.
Even though opting into a strategic default may be based on logic, the debate continues around the ethics of just walking away from fiduciary responsibilities. Although opting to utilize a strategic default strategy may be a logical decision, the debate exists as to whether or not the act is ethical. The CoreLogic data indicates that the wealthy do not really care about how their actions will ultimately affect their communities and neighbors.
