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.