Rich defaulting on their mortgages

I read an interesting article on msn.com today (Click Here for the msn article) about the rich walking away from their mortgages.  Some are even double dipping, they stop paying on their mortgage and if they have a line of credit, sometimes they pull all of that money out too.  The msn article calls these defaults, “strategic defaults”.  In California, the strategic default cases increased by 68 times from 2005 to 2008(not percent! times… WOW)

What if you lived in an area that had a financial perfect storm kind of occurrence?

Okay, what if you do live in one of the real expensive areas of the country (parts of California,  Florida, etc), where the value of your house has lost more than half it’s value?  What if you find a house that is a bigger better house than your, and it was in foreclosure in a great area, and discounted by 50%?  So now you have the possibility where you can buy a bigger better house for less money than you paid for yours…  And one that will probably double in 5 years when all of this mess is behind us (hopefully…).  That can be pretty tempting!

Hmmm, the financial logic is:  I’ll buy that bigger house in the more prestigious area that was foreclosed on for half price it was originally, then let my house go into foreclosure.  If after 5 or so years, the house market recovers, they gain on the uptick potentially doubling their money. And if the house doesn’t appreciate that quickly, they are still in a better area than before, possible with a better school system.  Only the banks lose out, wow, that is tough.  I live in an area where the houses didn’t fall much in value, so the people in my area are not presented with that immediate temptation.

Depending on the amount saved in such a transaction, that could be a big temptation.  I don’t know if the damage to your reputation would be worth that… but perhaps it is, it’s a hard choice.  In the past, there would be consequences for skipping out on your debt like that.  I bet if you were in a different country, that wouldn’t be allowed.  But in our country, most of the blame seems to be directed towards the banking system.  We the people, were just innocent lambs lead by the noses to be slaughtered.   I think the government underestimates some of us…  Some people, (probably most of use reading financial blogs) feel like we have been getting the short end of the stick lately, with government programs that benefit just a few of us, and not equally distributed like it should be.

While I don’t agree with the tactic above, I can see the financial logic and temptation that is presented and if you’re upset with the banking system or government…  Hmmm…

For most areas of the country though, below are some things to consider.

Money Reasons not to walk away from your mortgage:

• Damage will be done to your credit score
• Banks will be cautious to loan you money in the future
• Eventually, the value of your house will rise again
• You’ll regret leaving, especially if you hurt your neighborhood
• You’ll have a reputation as a non-trustworthy individual, forever…
• People will pity you and think that you can’t control your money
• Ethics!

Sad, I hope this trend of strategic defaults, doesn’t catch on much more than it has, else wise, we might have more systemic risk problems down the road.  Another possibility might be longer stagnation in the housing market…

-D