Strategic Defaults go Mainstream – Why the strategic default trend shows us the need for larger home buying down payments.
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You know something has gone mainstream when it hits 60 Minutes. The latest episode on 60 Minutes discussed the topic of strategic defaults and how 1 out of 5 current foreclosures are actually occurring because people are voluntarily choosing not to pay their mortgage. This is a trend that started last year and has picked up steam. The reason strategic defaults have gained favor is partly due to the fact that many Americans have chosen this as a path forward in dealing with large mortgage payments on underwater homes.
The 60 Minutes piece is worth watching. It seems like the question of morality comes up a few times. But I can assure you that if people went in with 20 percent down, they would think multiple times before walking away. Also keep in mind that big banks went into deals with little down and have also walked away from giant deals:
“Despite some indications that the economy is recovering, the housing market remains a disaster area. Currently, about seven million homeowners are behind on their mortgages and that number is only getting worse.
Banks, with the help of the government, are offering some relief to homeowners who’ve lost jobs and just can’t meet their payments.
But there’s a growing number who can pay but are simply walking away from houses that are now worth as little as half of what they paid for them.
It’s called “strategic default.” People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders – the banks – as zookeepers of an ever-growing parade of white elephants.
In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.”
Yet one point wasn’t discussed and this was why strategic defaults are only occurring during this housing crisis. That is, people purposely trying to lose their homes. The reason has to do with toxic mortgages like option ARMs that required very low down payments (or nothing). The minimum down payment we should require on all home purchases is 10 percent. Why? To avoid massive problems like this. Someone that has 10 percent in a home will think twice about walking away. They also won’t jump into a home with no skin in the game. Until we change these rules, we can expect more people to walk away from mortgages that are more valuable than the homes they are attached to.
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