Strategic defaults on the rise nationwide

With millions of Americans underwater on their mortgages, homeowners are increasingly deciding to stop making payments, even when they can afford it, because they feel it is in their best interest financially. This approach, called “strategic default,” is becoming especially popular in states like Florida, Arizona, California and Nevada — those hardest hit by the subprime mortgage bust and the subsequent foreclosure crisis. In Florida, strategic defaults accounted for 22.67 percent of all defaults statewide during 2008, up from just 5.1 percent during 2006, according to credit firm Experian and consulting firm Oliver Wyman. New York’s strategic default rate has grown, too, albeit less dramatically. In 2008, 14.49 percent of all defaults in the state were considered strategic. Experts say the growing number of people walking away from their homes is worrisome, because in areas with high concentrations of struggling homeowners, one neighbor’s strategic default may encourage others, and the result could be a major weakening in property values. “It’s going to be really difficult to prevent a cascade effect,” said Paola Sapienza, a finance professor at Northwestern University. Defaulters face a credit record tarnished by foreclosure, which can lead to higher interest rates on credit cards or other future loans. Worse, in some states, lenders can take legal action to seize bank deposits, cars or other assets. [WSJ]