Market Conditions: Chicago Area Homeowners Now Choosing Strategic Default
The Chicago Tribune explored the phenomenom of “strategic default” over the weekend. We already chattered about it a bit over the weekend in one of the other posts but I thought others might want to get into the conversation.
A “strategic default” is where the homeowner still has the means to pay the mortgage but decides to stop paying, and let the property go into foreclosure, even though it will ruin the homeowners credit.
Others have called it “walking away.”
Usually this is done for financial reasons.
Here are a few of the stories:
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.”
Lots of Chicago area homeowners are already underwater. According to the article, CoreLogic estimates 25% of Chicago area homeowners are underwater and another 5% have less than 5% equity which, as prices continue to slide in 2011, puts them in danger of being underwater as well.
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.)”
“Especially in states like Illinois, people held out hope for a little while,” Zingales said. “Maybe they are paying the mortgage a little but when they’re seeing that prices aren’t recovering, they default.
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 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.”
Some homeowners are getting all their ducks in order before they default by buying new properties and cars. Then, when the foreclosure hits their credit score, it doesn’t have as much of an impact.
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.”
Sinking values prompting homeowners to consider strategic defaults as best business decision [Chicago Tribune, Mary Ellen Podmolik, May 22, 2011]
