subject: To Default Or Not To Default: Walking Away Is The Preferred Option? [print this page] As more Americans find themselves upside down stuck in homes that are worth less than they owe the bank, they also find themselves with a difficult choice: Is it better to struggle in order to make monthly mortgage payments that may have increased due to an ARM loan, making it even harder to make ends meet, or simply walk away from the home altogether? Many Americans are choosing the latter giving up the house keys to their lender and downsizing to a rental home instead. For some this is a devastating change, but for others a welcome one. Former homeowners are now able to enjoy the benefit of some discretionary income while finding themselves free of the stress and worry of home ownership during a troublesome real estate market and challenging economy. That extra cash is instead being for things such as family vacations or other luxury items as Americans abandon homes in record numbers, evidenced by a U.S. home ownership rate at its lowest point in more than 20 years. These arent merely people who cannot make their house payments, either. Many are choosing not to make their mortgage payments and waiting until the bank kicks them out, all the while benefiting from holding on to their monthly mortgage money and using it for other things. These strategic defaults as they are called, are on the rise, with industry experts predicting that the number of homeowners who can pay but choose not to will swell to 1 million by the end of 2009 four times the 2007 level. This is not only bad news for the credit scores of the individuals who choose to purposely default, its horrible news for the banks who hold these home mortgages. So how bad will this situation get? Analysts predict that 21 million American households will owe more on their home mortgages than they are worth by the end of 2010. If 20 percent (1 in 5) of these households defaults on their loans, this would equal a hit to banks and investors of more than $400 billion. Theres an upside to this dilemma, however. The amount of debt that will be lifted from millions of Americans as they allow banks to take their homes will leave these folks better able to handle other financial obligations and a rising unemployment rate. For example, if you take a look at people who havent paid their mortgages for the last three months (4.8 million U.S. households) and add up how much cash this frees up from monthly mortgage payments, youre looking at an additional $5 billion dollars a month that could be poured back into the U.S. economy at a time when this type of financial stimulus is most needed. The only question is whether the ends justify the means: Is it more important for the banks to keep receiving payments, for Americans to be free from the burden of home debt, or for this additional windfall of funds to be circulating through the economy? And what are the long term effects to the health of U.S. mortgage lenders and individual credit ratings for those who choose to default? Will we be left with a large segment of the population in five years that lack the credit to buy another home or other large ticket items, and how will this hurt manufacturers and retailers of these items, as well as everyone who works in the real estate industry? Some experts say that the economy will improve more quickly if American shed their mortgage debts and start fresh. Others even say that the banks and mortgage lenders deserve to experience this rash of home loan defaults because theyve brought this situation upon themselves by allowing easy credit to those who they knew couldnt pay for expensive homes and through the free-wheeling application of adjustable rate loans that consumers simply didnt understand when they signed up for them. Still others blame the government for encouraging this situation in the first place. Regardless of where the blame lies, consumers seem to be taking action into their own hands for the time being while the current administration continues to encourage lenders to cut deals with people to keep them in their homes. Unfortunately these deals often dont meet with the approval of borrowers because they only reduce their monthly debt burden by a few hundred dollars at best. This cant compete with the prospect of cutting their debt by a few thousand dollars simply by walking away from their homes and seeking cheaper rental accommodations which in many cases are actually better than the homes on which they were paying mortgages in the first place. Regulators, politicians and lenders need to ask themselves what they would do if they found themselves under water with their home loans, and attack the issue realistically, rather than bury their heads in the sand and hope that the situation will right itself.
To Default Or Not To Default: Walking Away Is The Preferred Option?
