Earlier this week, I happened to stumble on a great article by Justin McHood who wrote about an emerging trend amongst homeowners – “Buying and Bailing”, wherein they take advantage of the fact that property prices are lower than ever, by buying a new home and then walking away from their current, underwater home.
Justin’s article is just one more piece of evidence that those who choose to strategically default on their mortgages are very well organized people, with great credit ratings, not at all like the image most people have in mind (unemployed, knee-deep in debt) when you mention a strategic defaulter.
An interesting study mentioned in the Washington Post sheds further light on the makeup of strategic defaulters. According to researchers at FICO, strategic defaulters are quite the opposite of what most people expect – they’re smart, they’re not in debt, and they always pay their other bills on time, even though they default on their mortgage.
In fact, FICO suggested that the vast majority make lots of preparations before just walking away. They make sure they’re paid up to date with their other bills, they take out new credit cards, and then they default on their mortgage. These people understand their credit rating is going to suffer, and so they take precautions against it.
Backing up the idea that strategic defaulters are a lot better off than we would first imagine is a recent report by Marketwatch, which showed that those people with higher credit ratings are in fact much more likely to strategically default.
“A safe conclusion to draw… is that homeowners with high credit scores have less to lose by walking away from their mortgage. The provider of these credit scores, VantageScore Solutions, has reported that the credit score of a homeowner who defaults and ends up in foreclosure falls by an average of 21%. This is probably acceptable for a borrower who can pocket perhaps $40,000 to $60,000 or more by stopping the mortgage payment.”
Judging by this evidence, it’s likely that we are going to see a lot more strategic defaults in the near future, as more and more borrowers catch on to what a great idea it is.