Strategic default — opting to walk away from a mortgage you can afford — isn't a new phenomenon in the housing crisis. But with home values continuing to decline, more owners are finding themselves in a position where they may see it as a savvy business decision to destroy their credit rather than wait years for prices to recover.
Marty Likier is one who knows the mental hurdles that have to be crossed to make the decision.
Likier put almost 20 percent down to purchase a $312,000 townhouse in Westmont in 2006 and lived there until two years ago, when he remarried and bought a home in Chicago Ridge. For a year he rented the townhouse.
When a change in rules at the community meant Likier's days as a landlord would end, he called his lender and asked if he could rework the loan, but he didn't have enough equity left to refinance the $240,000 mortgage.
Likier, 55, took a long look at his finances and the combined monthly mortgage payments of more than $4,700 and decided last fall that the struggle wasn't worth it.
He listed the townhouse for $249,000, figuring he would bring $20,000 to the closing table to facilitate a deal.
The listing has since dropped to $179,000, which is lower than the unit sold for when it was built in 1999. He stopped paying the mortgage in January and recently was served with foreclosure papers.
Despite the fact that he and his wife are employed and have an annual household income near $150,000, he's comfortable with his decision.
"I did a lot of soul-searching about whether it was morally the right thing to do," he said. "I felt there was no moral obligation to make a payment. The contract says it's a financial obligation, not a moral obligation.
"I was in a boat with a slow leak. It was manageable, but I know I was slowly sinking."
The decision to walk, tied to a housing crisis that continues to grip the market, is far-reaching, raising serious questions about whether financial commitments can ever be considered optional.
Earlier this month, CoreLogic reported that as of the end of March, home prices had declined for eight consecutive months, and more than 11 million borrowers nationally were underwater, which means they owe more on their mortgages than the home is worth. It's difficult to predict just how many of those borrowers may opt for default, but FICO, the widely used credit scoring system, recently developed a formula to help lenders pinpoint borrowers who might default.
"This is not a problem that's going away," said Joanne Gaskin, director of product management for scores at FICO Inc. "There's an exceptionally high interest from the banks in getting ahead of it."
There is growing consumer sentiment that if there is little financial upside to staying in a home, voluntarily defaulting on the mortgage is a smart decision, not a moral shortcoming. In its most recent national consumer survey, Fannie Mae found that 27 percent of people think it's acceptable to walk away from a mortgage if they face financial distress, twice as many as did a year ago.
The decision isn't made overnight. "You see the house price dropping, you don't walk away the next day," said Luigi Zingales, a professor at University of Chicago Booth School of Business who studies strategic defaults. "You hope that the first time the condo next to you sold for half price, that it isn't going to happen to (you.)"
Once accepting of the facts, it takes some time for people to rationalize the social and moral considerations of shirking their financial responsibilities and preparing for the legal and financial ramifications, Zingales said.
A recent study co-written by Zingales found a decrease in walkaways since December. He doesn't think the improvement will last.
"Maybe they are paying the mortgage a little but when they're seeing that prices aren't recovering, they default," Zingales said.
"A lot of people strategically default because they want to preserve their retirement savings."
When a vacation condo in Panama City, Fla., became difficult to rent, Naperville, Ill., resident Philip Burdi tried to sell it for $90,000 — far less than the $190,000 owed on the mortgage. His lender, doubting Burdi's financial hardship, wouldn't approve it.
Burdi stopped paying the two mortgages on the condo in March 2010 and is over the guilt, particularly after he tapped retirement savings to settle the second mortgage debt. He occasionally stays in the condo, and he lets friends and family stay there for free. He has yet to be served with foreclosure.
"I know it's going to have very dire consequences when the foreclosure happens," he said. "Millions of Americans are in the same shoes I'm in."
The fact that others are doing it doesn't make it moral, because a borrower signed a contract that said he will pay, Zingales said. And the problem is bigger than individual borrowers, he adds. "The cost long-term to society is very large, and not just for the housing market. Moving forward, promises will be a different thing and contracts will be a different thing if they can be broken so easily."
The decision to walk away carries long-lasting repercussions. A foreclosure strikes the same blow whether it was voluntary or involuntary, decreasing a credit score as much as 250 points, a drop that it may take an otherwise creditworthy consumer up to seven years to recoup.
That lower score will affect a consumer's ability to access additional credit, whether it is credit cards, an automobile or rental housing. Landlords pull credit reports too. Auto insurance premiums also would increase. "We're not sure that consumers understand the ramifications of it," FICO's Gaskin said.
Some do, though, and they're taking steps beforehand to position themselves for the difficult years ahead. They're making repairs to their cars and applying for extra credit cards because they won't qualify after a foreclosure.
Margie Jones prepared for the fallout, getting her finances in order and making any big-ticket purchases. When she and her husband bought a home in El Paso, Texas, they put it in his name only.
The Chicago native endured multiple deployments to Iraq and Kosovo as an Army warrant officer overseeing motor pools. But she no longer can take the financial stress associated with a three-flat in Chicago's Logan Square neighborhood, a home she still lists as her legal address, and a mortgage she took over from her mother more than five years ago.
Bought in 2002, the building where her mother and two renters live last appraised for less than half its purchase price. Efforts to refinance its two mortgages failed, and the first lien holder wouldn't approve a loan modification because the lender views Jones, who is now stationed in El Paso, as an investor.
The last time she made a payment on the first mortgage was in February.
"We were barely able to make ends meet," Jones said. "I told my husband, 'I can't do this anymore.' The day I made the decision to just walk away was one of the better night's sleeps I had because I wasn't going to worry about it anymore."
Jones, who said her credit score was above 700, is still waiting for the decision to catch up with her, but she's accepting of it. "I can stand to lose a couple hundred points."
Source: McClatchy-Tribune Information Services.