Homeowners with good credit are opting to give away the keys. (Photo: iStockphoto)
A couple of weeks ago, I interviewed Ron Jasgur, a Michigan-based real estate investor, for a piece I was writing about streamlining foreclosures and short sales. One of his comments about the massive number of bank-owned properties stuck with me: "Nobody’s modeling took into account that someone would wake up one morning and decide not to pay their mortgage."
Personally, I can’t fathom doing this, but apparently, it’s incredibly common. A new study from Experian and the management consulting firm Oliver Wyman reported that in 2008, nearly 600,000 homeowners just walked away from their mortgages.
The report particularly caught my interest because I’ve spent the last few weeks trying to find a family to profile on this very topic, and have gotten nowhere. I know of one family who handed the keys back to the bank, but it was a last resort. They lived next door to a house we’d bought to rehab and resell, and they were good neighbors. They came by one day to tell us they’d be moving out at the end of the month; they had an adjustable rate mortgage and their payments had doubled. They had tried everything they could to get a modification on their loan and the bank wouldn’t budge. They were devastated.
The people studied in this report, called strategic defaulters, hadn’t fallen behind on their payments -- they went from perfect payment histories to no payments at all. And people who had high credit scores when they got their loans were 50 percent more likely to hand over the keys than people with lower scores. Keep in mind that the biggest part of having a great credit score is paying your bills, and paying them on time. In general, the people with great credit scores are very fiscally responsible.
Strategic defaulters were most likely to live in markets where home values shot up and crashed dramatically, including California and Florida. They had large mortgage balances and their home values had dropped to significantly less than what they borrowed. They may have known that their credit would take a major beating if they walked away from their mortgage, and felt fine about that. A primary researcher on the study said they appeared to look at it as a business decision, and the most practical solution given the circumstances.
I’ll admit to having a hard time wrapping my head around this attitude, both because of my commitment to honoring my obligations, and my love of being a homeowner. When you think about it, there's nothing very practical about owning a house, but it’s so much more than an investment strategy to me; it’s a core part of my identity.
Obviously, a lot of people have come to a different conclusion about the value of homeownership. I’d love to get other people’s thoughts on the subject. And I’m still looking for a family to profile who walked away from their mortgage. If that’s your story, and you’d be willing to share it, email me at blog@reporter.cyberhomes.com—Pat Curry