A US News and World Report article published Tuesday highlighted the fact that the foreclosure crisis not only continues, it continues at a record pace:
Nearly a year after the Obama administration unveiled its ambitious housing rescue program, foreclosure tallies continue to break records. Foreclosure filings were reported on more than 2.8 million properties in 2009, up 21 percent from the previous year and 120 percent from 2007, according to RealtyTrac. With nearly 10 percent of mortgages now delinquent–which is also a new record–even more homeowners appear headed for foreclosure this year.
Considering the depth of the recession, the excesses of the housing boom, and the current high unemployment rate, this shouldn’t be much of a surprise. What is surprising, however, is the growing number of intentional foreclosures due to so-called “strategic defaults”:
The number of so called “strategic defaults” more than doubled, to 588,000, from 2007 to 2008, according to a study by Experian and Oliver Wyman. A separate 2009 survey found that more than a quarter of all existing defaults were strategic.
In other words, many homeowners who are otherwise financially sound are making the strategic financial decision to just walk away and allow their homes to go into foreclosure. Instead of paying astronomical payments on a huge mortgage for a tiny condo purchased at the top of the market, some homeowners are deciding it’s simply not worth it – particularly when it is now possible to rent a similar property for far less. Some experts are not only not surprised by this, they are surprised it isn’t happening more:
“Homeowners should be walking away in droves,” Brent T. White, a University of Arizona law school professor, said in a recent paper. “The financial costs of foreclosure, while not insignificant, are minimal compared to the financial benefit of strategic default.”
As home values continue to decline and rents are forced down even more (as they have been here in Southern California), we can expect to see this happen more. One simply cannot argue with the pure rationality of a homeowner deciding to walk away when a similar house down the street can be rented for far less than his present mortgage payment.
-CH
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