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Luke Mullins
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. "A massive supply of delinquent loans continues to loom over the housing market," RealtyTrac CEO
Homeowners have found themselves in foreclosure for a number of reasons. Some purchased properties they could never really afford. Others lost their jobs -- the national unemployment rate remains in the double digits -- and had no way to make mortgage payments. But as the crisis rumbles forward, an additional driver of home foreclosures has become clear: Many borrowers have the means to keep paying the mortgage but are simply walking away because they believe it's best for their finances.
The number of so called "strategic defaults" more than doubled, to 588,000, from 2007 to 2008, according to a study by
The case for strategically defaulting is linked to negative equity, or owing more on your home than it is worth. With home prices at the national level having dropped roughly 30 percent from their 2006 peaks -- and a great deal more in certain bubble markets -- a considerable chunk of property owners are now in this fix. Nearly 1 in 4 borrowers currently have negative equity, according to First American CoreLogic. And rather than continuing to make payments on an investment that's now worth significantly less than what they paid for it, many borrowers are throwing in the towel.
White uses the following example to demonstrate how many borrowers are better off defaulting: A young professional couple with two children pays
After the historic housing bust, their home is now worth
"Assuming they intend to stay in their home ten years, [the homeowners] would save approximately
The argument against strategically defaulting is much more straightforward: You promised to repay the loan when you took out the mortgage, and it's your responsibility to do everything possible to honor that commitment. Avoiding the guilt and shame that can accompany a foreclosure is one of the top reasons struggling homeowners don't strategically default, White writes. On top of that, a foreclosure significantly damages one's credit -- making it difficult, if not impossible, to obtain a mortgage for years afterward.
But in a recent white paper,
The issue of negative equity triggering strategic defaults represents a nasty headache for the Obama administration. The
Although Uncle Sam has reduced mortgage payments for more than 850,000 borrowers so far -- for a median savings of more than