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The new wave of foreclosures - Who is most likely to default on their mortgages?
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The new wave (AP Tim Crochak Canadian Press)
We are witnessing a new trend in mortgage defaults that has not been seen before. As mortgage values plummet, those with lower credit scores and smaller mortgages are trying every option they think might be open to them, often making mortgage payments while running up exorbitant credit card debt, in an attempt to keep their homes.
On the flip side, in 2008, and more so in 2009, we are seeing a "wave" of those with high, nearly perfect credit just walking away from their homes. Some of these people have attempted to get modifications, and been denied because lenders are not doing modifications for those who are paying all their bills on time and have great credit. The old reasoning was that these people will keep on paying their mortgages. That has always been their pattern, and it won’t change.
Surprise! There has been a massive study of 24 million individual credit files showing that those with the best scores are more likely to just walk away than those with lower scores. In 2008, 588,000 people with stellar credit just walked away, without notice, without ever missing a credit card or house payment. This number accounted for 18% of the serious delinquencies in 2008.
These people, in general are well educated, often have high balance loans relative to the value of their homes, and they are aware of the dire consequences to their credit. The number in 2009 was more than a million home owners, most notably in areas where there were the largest losses of values relative to the boom years. Two thirds of these people are walking away from the home they live in, but it appears the number of investors “walking” is also on the rise.
The term being applied to these home owners is “strategic defaulters.” It appears that these people are viewing walking away as a “business decision.” However, there are others who find they simply have no other options. In California, there were 68% more strategic defaults in 2008 than in 2007. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.
If you are considering a “strategic default,” you might make an effort to find your rental before you default, while your credit score is still high. It is much easier to rent with good credit. Otherwise, you may find your rental options very limited.
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