Waves of Americans faced with negative home equity are choosing to game the system and walk away from their mortgages and strategically default, despite their likely ability to pay.
Research by Experian and Oliver Wyman shows that there were 588,000 strategic defaulters in 2008, concentrated in regions worst hit by the housing bust such as California and Florida.
The thing is, these strategic defaulters are frequently the type of borrower with perfect credit histories and high credit scores. Unfortunately, they also tend to be the type of people pretty knowledgeable about the trade-off between owing a few hundred thousand dollars on a house and destroying their credit history via default.
LA Times: People who default strategically and lose their houses appear to understand the consequences of what they’re doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters “are clearly sophisticated,” based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.
While we agree with Felix Salmon that strategic defaulters act perfectly within the rights banks agreed to, we can’t help but notice a deafening silence from financial industry critics on this one.
Imagine the firestorm this could have created, should the tables have been turned and it were banks (even within their rights) gaming the system.
Perhaps in the future showing off financial knowledge could ding your credit score.