Mortgages can be a heavy burden, especially on households that have suffered the worst this recession has had to offer. But what of those who are gainfully employed yet owe the bank tens of thousands more than their house is worth? An immediate sale would leave the homeowner responsible for the difference. Furthermore, high mortgage payments can be a drain on potential savings. For many, strategic defaults—where the borrower has the ability to pay but chooses not to—may be the answer.
The “when” of strategic defaults is up to the borrower, but the “where” is affected by a mix of state statutes and burst housing bubbles. The Wall Street Journal highlights the trend in an interactive map of strategic defaults in the United States between 2004 and 2008. Strategic defaults are most common in California, Nevada, Arizona, and Florida—the epicenters of the last decade’s housing boom. Rates in Arizona and California are also aided by the legal landscape—lenders cannot pursue a borrower’s other assets if they default.
Strategic defaults are nothing new, but their prevalence is. Part of that may be the current economic climate and the vagaries of the housing bubble. Many Americans’ homes are worth more than 10 percent less than they owe the bank, a critical number according to research coauthored by Paola Sapienza, professor of finance. As negative equity in a house climbs above 10 percent, the number of solvent borrowers that simply walk away increases dramatically.
“It’s relatively easy to walk away in the United States,” said Sapienza, but the number who do is relatively low. In the past, a sense of morality may have kept potential strategic defaulters in their homes. And while that may still be the case for a large number of people today, a number of factors including the neighborhood foreclosure rate have softened borrowers feelings toward the matter, according to Sapienza’s research.