Fewer Borrowers “Purposely Default on Mortgage”

As home values decreased and more borrowers found themselves underwater, some home owners were opting for “strategic default,” choosing to stop making mortgage payments even though they could afford to pay. But analysts say the trend is on the decline.

In an analysis by JPMorgan Chase into strategic default, analysts found 60 percent of all defaults were strategic by the middle of 2009–that’s more than double the percentage in January 2008.

However, the number has been decreasing. Analysts say that strategic defaults now make up less than 30 percent of all defaults (or 10,000 strategic defaults compared to 20,000 from one year ago) and that borrowers who are delinquent more than 90 days have even “lesser strategic delinquencies.”

“Overall, strategic defaults have stabilized as home prices flattened and initial jobless claims declined,” analysts say.

About 42 percent of underwater borrowers–those who owe more on their mortgage than their home is currently worth–remain current on their mortgage, according to the JPMorgan Chase analysts.

“Of course, the moral hazard of potential strategic defaults in the future is still present,” analysts say. “Even though these borrowers have not been defaulting in large numbers, the event risk remains that they could.”

Source: “Signs Show Strategic Default on the Decline,” HousingWire (May 16, 2011) 

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