26% of mortgage delinquents default because they want to
The reason for the defaults of convenience is simple: Record low down payments during the real estate boom combined with rapidly depreciating home values have left about 20% of home owners with mortgages underwater.
Even though lenders can in most states technically pursue mortgage deadbeats' for damages, that almost never happens. Usually they just take the house and let the person walk away with their credit destroyed.
So why would you keep making payments on a home that costs you more per month than a rental and won't give you any equity for at least a decade?
It used to be that that having your credit score ruined was a pretty serious punishment because few landlords would rent to people with low FICO scores. But now that rental unit vacancies are up to 7.5% nationwide -- their highest they've been in 22 years -- few landlords can afford to be so picky. Show a steady job and fog up a window and they'll hand you the keys and possibly a new Nintendo Wii as a move-in bonus.
What can be done to stop this trend of people bailing on homes as the market softens? Probably nothing, and it's a problem that the Obama administration's housing recovery plan is strangely silent on.
But it is an important lesson in the danger of sticking people in homes with tiny down payments. If someone puts down 3% and the home declines by 25%, they really are not realizing any financial benefit from home ownership.
The moralistic set has jumped all over people who abandon their homes for financial reasons even when they could afford to continue making their payments.
But back in March, Felix Salmon put it in context in reference to a California home owner who had negative equity: "California is a non-recourse state, which means that the lender, was fully aware from day one that if the value of the mortgage ever exceeded the value of the house, there would be a strong financial incentive for the borrower" to mail the keys back to the bank and move on with his life.
Best of all, intentionally missing payments on a mortgage can help borrowers qualify for prinicipal reductions and other parts of the loan modification programs.
It's stupid that it works that way but the banks are playing the system like a fiddle and if consumers want to get ahead, they have no choice but to do the same thing.