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Personal Finance -
Mortgage
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Written by Ahmed Amr
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Friday, 18 December 2009 10:21 |
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Page 1 of 2
With all the talk of economic recovery and a bottom to the housing bust, there appears to be a new trend out there that should give pause to anyone buying into rosy scenarios of an economic recovery around the corner. People are walking away from their houses even when they can afford the mortgage payments. And they're doing it because it's in their best financial interests. The financial industry coined a term for this new phenomenon - "Strategic Defaults on Mortgages." It's happened before, notably in California in the 90s, but this time, it is far more widespread.
Take Derek Figg, who was recently profiled in a Wall Street Journal article. "Mr. Figg felt trapped in a home he bought two years ago in the Phoenix suburb of Tempe for $340,000. He still owes about $318,000 but figures the home's value has dropped to $230,000 or less. After agonizing over the pros and cons, he decided recently to stop making loan payments, even though he can afford them. Mr. Figg plans to rent an apartment nearby, saving about $700 a month."
Later on in the article, Mr Figg makes a case for his strategic default and why he's "able to sleep at night." The way he sees it, lenders were guilty of having manipulated the housing market during the boom by accepting dubious appraisals. And as a young engineer facing a volatile job market, walking away from an upside down mortgage increased his options to "find work in other parts of the country."
Now some people might have a harsh judgement of Mr Figg - but not Brent White - a University of Arizona associate law professor. The way professor Brent sees it - people should make the decision based on "their own interests - unclouded by unnecessary guilt or shame." So before you get bent out of shape and start hurling rotten tomatoes at your humble scribe or Mr Figg - keep in mind that this article is based on report in the Wall Street Journal and the professor says and I quote "Borrowers can take a cue from lenders that ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility."
So, there you have it - strategic defaults are a financial decision. Of course, Mr Figg is lucky enough to be doing his strategic defaulting in Arizona, where the lenders can't pursue his other assets.
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