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Fannie Mae Sees Strategic Default on the Minds of Underwater Borrowers

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[Update 1: clarifies Harris Interactive data set] Mortgage-holding homeowners that owe more than their homes are worth show a greater tendency toward delinquency behavior, according to a recent Fannie Mae (FNM) housing survey of more than 3,400 Americans. A separate poll recently found that 24% of mortgage borrowers believe they are underwater. Although Fannie found that two-thirds of survey respondents prefer owning a home to renting -- even in the face of economic challenge and the downturn in housing prices -- the mentality of strategic default is spreading. A contagion effect within communities is leading borrowers to consider default as an acceptable option in the face of financial hardship, Fannie found. Both delinquent and current mortgage borrowers are more than twice as likely to have seriously considered stopping payment if they know someone who has already defaulted. Despite a growing acceptance of strategic default on the community level, thinking about walking away and actually walking away are separate events, according to Kathleen Day, a representative at the Center for Responsible Lending. "From everything we know, no one defaults if they could possibly stay in their homes," she tells HousingWire. "We just don't see people responsibly walking away. It's people who are at the end of their economic rope." Nevertheless, according to the Fannie survey results, underwater borrowers are both more likely to be delinquent and to have considered default: But industry fears of strategic default may be overblown, as nearly nine in 10 Americans and more than seven in 10 delinquent borrowers believe it is unacceptable to stop making mortgage payments altogether. Fannie found that only 39% of delinquent borrowers and 9% of underwater borrowers have seriously considered stopping payment. "The public also strongly believes in the importance of upholding the financial commitment involved in buying and owning a home, even during these challenging times when home values have fallen," said Fannie president and CEO Mike Williams, in a statement. Slightly more than half (53%) of respondents to Fannie's survey believe homeowners bear the responsibility for taking out loans they cannot afford. But 58% of delinquent borrowers believe the mortgage lender is to blame, since the lenders "know better what people can afford and should help guide people." Optimism for a brighter economic future in 2011 is also building, as Fannie found that 44% of all respondents and 63% of delinquent mortgage borrowers expect their financial situation to improve next year. “Consumers … are rebalancing their attitudes toward housing and homeownership by adopting a more realistic, long- term approach, and are less willing to take risks," said Doug Duncan, Fannie chief economist. "This focus on sustainable housing is better for the economy, better for the housing market and better for America’s families.” Despite the brighter outlook, many mortgage-holding Americans are still facing significant financial difficulty. An online poll of 2,320 people, conducted in the first week of March, by market research firm Harris Interactive found more than two-thirds (69%) have an outstanding mortgage. And of that number, one in nine borrowers (11%) report having "a great deal of difficulty" paying off their mortgages. Another 18% are having "some difficulty." Out of the survey respondents who have mortgages, 24% believe they are underwater, owing more on their mortgages than their homes are worth. Of those that claim to be underwater, 26% are having "a great deal of difficulty" and 23% are having "some difficulty" paying their mortgages. Additionally, of those that believe they are underwater, 42% are "very concerned" and another 38% are "somewhat concerned" about not having enough income to cover their costs. "These findings underline the very large number of people whose homes are worth less than their outstanding mortgages and even larger numbers who are worried about covering their costs and expenses generally," Harris Interactive said in the poll results. If the percentages are converted into numbers, approximately 27m adults believe they are 'under water' – that their houses are worth less than their mortgage debts." Write to Diana Golobay. Disclosure: the author holds no relevant investment positons.

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