To strategically default or not? That is the question
The housing crisis brought several new words into the American lexicon, including the oft used phrase "strategic default."
But is the strategic default option worth it for homeowners who are underwater and might be risking their credit histories to break free? That question remains one of Shakespearian proportions, with the answer to the "default or not to default" question often depending on whom you ask.
In the foreclosure-challenged state of Nevada, 45% of Nevadans surveyed said there is nothing wrong with strategic default, according to the Nevada Association of Realtors, which issued the report. An equal number disagreed, saying they have a problem with the idea.
"This year's report shows it's more socially acceptable to strategically default on your mortgage. I hope banks and government leaders will look at this to help them get ahead of these issues," NVAR's president Blane Johnson said.
At the same time, Nevada citizens are less optimistic about government intervention to help distressed borrowers. Only 9% of those facing a foreclosure and only 10% of all the state citizens surveyed believe foreclosure prevention programs have actually helped.
Despite low levels of confidence, 55% of Nevadans think government still has a key role to play in addressing the problem.
Johnson believes government officials and financial institutions should get ahead of future strategic defaults by working harder to streamline and encourage short sales as well as other loss-mitigation strategies.
Even if strategic default makes financial sense, economists and homeowners showed reluctance to pull the plug on an underwater property in the most recent Zillow Home Price Expectations Survey from Zillow and Pulsenomics.
Seventy-one percent of the economists interviewed said they would not strategically default even if they owed at least 40% more than their home's current worth. Fifty-nine percent of the homeowners interviewed also said they would not strategically default in the same situation. About 37% of those homeowners cited moral reasons, while another 35% said it didn't make sense because they intended to stay in their current property for a long time.
"We were initially surprised that so few economists would be willing to strategically default, since when you do the math, it can often be the best economic choice, if you leave aside moral and ethical considerations," said Zillow Chief Economist Stan Humphries. "Of course, strategic default is not just a mathematical decision. The most common reason for avoiding strategic default cited by homeowners was that it is a moral issue. That likely comes into play with economists and analysts, as well."