Strategic Default Accounted for 31 Percent of Foreclosures in First Quarter

May 3, 2010 No Comments »

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Strategic default accounted for 31 percent of foreclosures during the first quarter of 2010, according to the Chicago Booth/Kellogg School Financial Trust Index.

That’s up from 22 percent a year ago, and significantly higher than the 12 percent figure Morgan Stanley attributed to strategic default in February.

The Kellogg School researchers believe part of the rise has to do with the increased perception that fewer banks and mortgage lenders will come after borrowers who don’t pay their mortgages.

“With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments.” said researcher Paola Sapienza in the report.

The results also indicate that strategic default increases by 29 percent if the homeowner is able to find an alternate way to finance a new home.

And if the homeowner learns they have a neighbor with negative equity that received a partial loan for forgiveness, the likelihood of strategic default rises 23 percent.

“A key deterrent to strategic default is the fear of losing a good credit score,” said researcher Luigi Zingales. “Approximately 74 percent of homeowners in our survey believe it is very important to maintain good credit and this can be a factor in encouraging them not to walk away.”

Of course, credit scores seem to be negatively impacted via loan modifications as well, so some borrowers may opt to walk regardless.

Fico’s latest stance on loan modifications and credit score is that they won’t hurt borrowers at the moment, but could once more data is compiled.

That type of uncertainty doesn’t bode well for those hanging on based on credit score alone.

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