‘Walking’ on a loan: Unable or unwilling to pay?

Strategic defaults are on the rise due mainly to two factors: the growing number of mortgages where the outstanding balance is greater than the home’s current market value and continued high unemployment, according to a study by the Mortgage Bankers Association.

Strategic default is the practice of a homeowner defaulting on a mortgage – whether by choice or necessity.

“Recently, the overwhelming media coverage of the current financial crisis has made homeowners aware – or at least alerted them to become aware – of their equity position in their home,” said Michael Seiler, who headed the study.

“While the merits of such a choice can and will continue to be debated, what is indisputable is that the possibility to strategically default has certainly been brought to the attention of current homeowners like never before, with potentially negative consequences for housing markets,” Seiler said.

The study, citing other research, reviews the main drivers of default including unemployment, declines in home prices, life changes such as illness or divorce and other shocks to household income or wealth.

The study also found that it is very difficult to determine whether a borrower is unable or unwilling to pay.