What disease and strategic default on mortgages have in common
A new report conducted for a mortgage-industry trade group likens "strategic default" -- walking away from a mortgage you can afford to pay because you owe more than your house is worth -- to a contagious disease.
It's not just the idea that strategic defaulters spawn more strategic defaulters. The report's authors focus much of their attention on real estate experts -- "mavens" -- who advocate such a move and sway underwater homeowners to their way of thinking.
"Much the same way as a disease spreads throughout a population, so too do decisions to 'strategically' default," the report concludes, adding: "Mavens are more contagious than non-Mavens because people place greater trust in their opinions. ... In fragile markets, advice by influential Mavens can result in a flood of strategic defaults, causing a contagious downward spiral of home prices and potentially a market collapse."
The report was sponsored for the Mortgage Bankers Association's Research Institute for Housing America. Last year, the bankers association's then-CEO said would-be strategic defaulters should think about the damage they would do to their neighbors' property values and their own reputations. "What about the message they will send to their family and their kids and their friends?" John Courson told The Wall Street Journal at the end of 2009.
That just before the Mortgage Bankers Association sold its headquarters building for millions less than its 2007 purchase price -- and millions less than its financing, too. The WSJ reported at the time that the association would not disclose the terms it negotiated with its lenders, but sources thought the group would be paying back only part of the $30 million that the sale price hadn't covered. Irony lovers had a field day.
People have debated the ethics and bottom-line considerations of walking away for several years now. The ethics argument boils down to whether paying your debts is a moral obligation or a contractual one (i.e. "I pay the mortgage or I give you back the house, so here's the house, buddy"). On the financial side, there's the chance to get out from under a house that might never be worth what you paid for it vs. the effect on credit scores, the ability to get security clearances and the possibility of future dunning attempts.
Some states are non-recourse, meaning that mortgage holders can't come after you for the difference between what you owe and what they can sell the house for. Others -- including Maryland -- allow the debt collectors to come calling.
Last year I wrote about a strategic defaulter who was planning to file for bankruptcy protection after he walked away from his Baltimore home.
So, folks: What do you think of strategic default nowadays? Do you think the "disease" theory is apt?