The ethics of strategic default
Posted on 21 August 2010
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/the-ethics-of-strategic-default
Here are three words that can stir moral outrage: Just walk away.
The phrase refers to strategic defaulters–homeowners who are opting not to keep paying mortgages that they can afford. Unlike the millions of hardship foreclosures afflicting residential real estate, strategic defaulters conclude that it no longer makes economic sense to do so when mortgage balances far exceed the value of a property’s plunging value.
The number of strategic defaults is rising in a chronically ill housing market–and older homeowners are affected disproportionately because their wealth is more likely to be tied up in real estate.
The topic of strategic default stirs strong emotions; I explore the ethical issues in this week’s post at Reuters.com.
One important issue here is the apparent double-standard being applied to homeowners and corporations. A growing number of corporate borrowers are walking away from loans on commercial properties that no longer make sense; Yahoo! Finance reports on the trend.
Related posts:
- Strategic default: The book that banks don’t want you to read
- Strategic defaults: Why older homeowners walk away from mortgages
- Housing collapse prompts growing focus on strategic mortgage defaults
- Reverse mortgage borrowers face growing default problem
- Social Security and government default: Q&A on your benefits
August 21st, 2010 at 9:55 pm
Having a home that’s worth less than the mortgage is not a problem unless and until it’s time to sell. Until then, the monthly payment might as well be considered rent.
I liken this to buying a new car. We’ve always known that a new car loses value so quickly that, if it is financed, we owe more than the value of the car almost immediately. We’ve always accepted this. I bought my first new car in 1967 and understood the principle even then.
But let it happen to a home and everyone panics. You didn’t take your new car, park it by the side of the road and walk away because it was suddenly worth less.
No need to do it to a home.
Obviously, this doesn’t apply to a job loss or other financial disaster, but those aren’t the people we’re talking about here.