Strategic Defaults – Wrap up from last weekend

Part 4 of – see bottom for links to each post in the series.

I think we’re going to see more and more of these so-called strategic defaults in the Charlottesville area. How many? It’s hard to tell. I hate being a cop-out, but I’ll stick with my standard answer of “we’re not going to know how good or how bad the Charlottesville real estate market is until we have the benefit of hindsight.” Suffice it to say, I suspect we’ll see more of these so-called “strategic defaults” in 2010.

The big question is – what are the ramifications to the (former) homeowner for choosing to walk away? The short answer from everything that I’m reading (I’m still trying to educate myself on this) is that there is no good, clear answer as to what the consequences are.

Regarding the moral question as to whether walking away from your mortgage is immoral, I think the better question is: To whom do you owe your allegiance and loyalty? To your family or to the lender (and more widely the financial system). This is a big question that will not be answered for quite some time.

From the WSJ:

“Homeowners should be walking away in droves,” Brent T. White, an associate professor of law at the University of Arizona, wrote in a discussion paper. “The real mystery is not—as media coverage has suggested—why large numbers of homeowners are walking away, but why, given the percentage of underwater mortgages, more homeowners are not.” (Read his full paper.)

Strategic Defaults:

Strategic Defaults: Naughty or Nice? (no longer available)

Why are more people walking away from the obligation they created when they agreed to take the mortgage?

The answer to that question seems to be aligned with two issues:

1.) Negative equity is making people question whether making payments on a depreciating asset makes sense.

Many people are beginning to look at their house solely as a financial investment and that investment is turning sour. They are questioning whether it any longer makes sense to make payments on an investment which continues to lose value.

There are even websites purely for those seeking to walk away – You Walk Away (no longer available)

Walking Away From The House She Can Afford – we talked about this story on the show.

If Morgan Stanley Walks Away, Why Shouldn’t You? Firm Walks Away From 5 Properties

More on Strategic Defaults – Calculated Risk

—

Part 1- Quick Update on the Charlottesville Real Estate Market
Part 2 – Short sales and Foreclosures in Charlottesville
Part 3 – Homebuyer tax credit in 2010 – Who’s Eligible?
Part 4 – Strategic Defaults in Charlottesville – What will 2010 look like?
Part 5 – Green building trends in Charlottesville

Podcast of the full hour show and transcript.

Update 3 January 2010: Bloodhound Blog expands on the New York Times article cited below by jmcnamera.