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Why homeowners strategically defaulting on loans? Strategic defaults have taken precedence over foreclosures, loan losses, delinquencies, and subprime mortgage bonds. Credit bureau Experian and consulting company Oliver Wyman joined hands to investigate the debt management behaviour and patterns of homeowners, especially those who strategically default on their payments. Their research reveals some startling facts. 1. The percentage of strategic defaults is by far the greatest in the real estate financial sector. The year 2008 saw around 580,000 cases of strategic defaults, which was double the total in 2007. They stood for 18% of serious delinquencies, the ones that extended for more than two months in the last quarter of 2008. 2. Homeowners who strategically default alternate between perfect payment histories to no payments at all. As opposed to them, the financially harried borrowers try to make their mortgage payments, even at the cost of defaulting on other payments. 3. Strategic defaults are more common in negative-equity markets where the real estate prices skyrocketed during the boom and then have started to decline since 2006. For example in California, defaults were 68 times higher than that in 2005. In several other parts of the US, defaults were nine times higher in 2008 as compared to those in 2005. Then again, it was 46 times higher in Florida. 4. Surveys reveal that two-third of mortgage defaults are on primary homes, especially among those who have only one property. For those with several properties, the default is more likely on second homes or investment properties. 5. Borrowers with large mortgage balances are more liable to default than those with low mortgage balances. Likewise, homeowners with high credit scores default more than those with low credit scores. These credit scores are in two highest categories measured by VantageScore, a venture created by Experian, Equifax and TransUnion. 6. Strategic defaulters are aware of the consequences of their actions, fully conscious of the fact that their abandonment can lead to poor credit scores. For instance, they are more likely to default on home equity loans to take out more cash on their equity lines. Most view this strategy as practical under the tough financial market conditions. The Experian-Wyman research does not concentrate on the moral or legal angle of strategic mortgage defaults. However, it advises that lenders should use discretion and caution while offering loan modifications to filter out in advance any potential strategic defaulter. |
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