Study Shows Strategic Default Influenced By Social Circle

Strategic default is defined as walking away from a mortgage that you have the ability to pay. Why do homeowners do this? Or not do this? It can be pretty much broken into two schools of thought.


First, the ethical argument. You agreed to buy your house at a then fair market price with a mortgage at the then market rate. You signed a contract obligating you to keep making payments even if similar houses are now selling for half the value of what you paid. Even if a new mortgage can be obtained at a lower interest rate by another buyer. Even if you can’t refinance.

The other argument is that this is a business deal, plain and simple. If I don’t make the payments, you take the house. I’m not going to make the payments, so feel free to take the house.

The report examines the use of social media and social influence on our decision making. If enough people that you know (or are connected to) are saying its fine to strategically default, you begin to get more receptive to the idea. After all, it worked out great for them, why not me? (A lot like the continual anecdotes I hear about the ‘buddy’ that picked up a $600,000 house for $100,000 as a foreclosure - I can do it, too.)

An industry source, CoreLogic, says that 11 million homes (22 percent of the housing market) are underwater and that another 2.4 million have less than 5% equity, so there’s a lot of potential for more strategic defaults out there.

Banks are also part of the problem. People looking for refinance options often get the runaround or can’t qualify with the current stringent requirements. I know mortgage reps that can’t refi their own homes, what chance does a regular consumer have? It may be easier for some people to opt into strategic default as a result of feeling helpless, or because they think the big corporations don’t care about them.

A single strategic default (which ends up as a foreclosure home) won’t kill the value in a neighborhood. But think about the areas where there are a lot of strategic defaults in addition to the short sales and foreclosures due to hardship – loss of a spouse, losing a job, illness. Distressed sales do, in fact, bring down property values and are not good for neighborhoods. Strategic default is only a part of the overall problem.