Updated: 7/13/2011 12:42 PM ET|
The rich bail faster on mortgages
Wealthy but 'underwater' homeowners are giving up on paying their mortgages as a financial tactic, a study finds. Those with smaller loans are less likely to do so.
In this dismal housing market, homeowners with good credit and no late payments are making what appears to be a strategic decision to walk away when their home's value falls below what's owed.
"The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," concludes a report on research by Experian, the credit agency, and Oliver Wyman, a management consultant company.
The better their credit rating, the more likely homeowners were to default, the report found. The trend was most pronounced where prices have fallen furthest: Florida and the West, especially California.
The finding -- that 588,000 borrowers appear to have strategically defaulted in 2008, a 128% increase from the year before -- surprised the researchers. Piyush Tantia, who conducted the research for Oliver Wyman, and Charles Chung of Experian spotted the trend while analyzing 24 million credit files to see what they could learn about mortgage delinquency.
Foreclosure as a financial strategy
Strategic defaulters stand out among "underwater" mortgages (recently estimated at more than a quarter of all home loans) the researchers said, because they:
- Pay all their bills consistently and on time until abruptly stopping mortgage payments with no attempt to get current again.
- Keep current on other debts after defaulting on the mortgage.
- Keep up payments on home equity lines of credit, sometimes drawing out cash, before defaulting on both the first mortgage and credit line.
This "sophisticated" combination of moves and timing suggests borrowers are employing foreclosure as a calculated financial strategy, said Tantia and Chung.
They conclude that 18% of the borrowers with mortgages 60 days past due in the fourth quarter of 2008 were acting strategically, up from 3% -- "barely noticeable," the report says -- in late 2004. Most defaults, however, are driven by financial distress. Defaults due to troubled finances grew from 31% to 51% of loans in the same time frame.
It appears that the more money people feel they're losing, the more likely they are to bolt. Owners with smaller loans were less likely to strategically default, even when facing the same percentage of loss.
For example, "once you hit the $200,000-and-up loan size in California, you start to see about 33% strategic defaults," said Tantia. A similar pattern, with 18% to 20% strategic defaults and lower loan amounts, plays out in the rest of the country: "This tells us that the threshold probably is a dollar value and not a percentage."
VIDEO ON MSN MONEY
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
RECENT ARTICLES ON CREDIT SCORES
If your wallet is running on empty but you still have more shopping to do, we've got you covered. Here are 10 cool kid gifts that won't break the bank.