Just how prevalent was the problem of borrowers walking away from their “underwater” homes following the financial crisis, when, in fact, they could have paid their mortgages?
If you read certain mainstream media reports that were published during the post-crisis years, you might have come away with the feeling that the problem was widespread; that a large percentage of the foreclosed properties that were in the “shadow inventory” were vacant “zombie” properties where the owner could have paid, but chose not to because their home was no longer worth what they had borrowed. This is classically known as “strategic default.”
But just how many borrowers, really, “strategically defaulted” their way out of their underwater mortgages in the post-crisis years?
According to a recent report from RoundPoint Servicing, it was far fewer than many of those initial media reports seemed to indicate.
“The vast majority of the homeowners who lost their homes during the crisis fell prey to a failing economy and personal misfortune that took away their ability to meet their financial obligations,” says Brad Johnson, chief operating officer for RoundPoint Mortgage Servicing. “Servicers at the time were overwhelmed by the sheer volume of distressed homeowners and often lacked the staff and technology to deal effectively with the crisis. It was the search for a sexy headline that drew mainstream reporters to the very few stories of those who chose to walk away from what for most is the largest financial investment they will ever make.”
RoundPoint references a study conducted in 2015 study by Harvard University’s Shorenstein Center on Media, Politics and Public Policy that shows, among other things, that of the homeowners who defaulted on their mortgages between 2009 and 2011, only 1% had the means to pay their mortgage but chose to walk away.
However, articles published by the mainstream media at the time made strategic default seem like a significant part of the foreclosure crisis story.
Johnson points out that it was in fashion at that time to write stories about how American homeowners were disillusioned with the financial services industry – and so bereft of hope in saving their underwater homes that they simply walked away.
The Shorenstein Center study, however, shows that this was not the case. In fact, the think tank’s investigation shows that of the homeowners who suffered significant financial setbacks during the downturn, 80% still managed to make their mortgage payments.
“People do not give up their homes willingly and we, as an industry, must do all we can to make sure that they never have to,” Johnson says. “Default, whether strategic or otherwise, is devastating for borrowers, servicers and investors. It falls to America’s mortgage loan servicers to always show borrowers the path to continued home ownership, for the continued well-being of their families, our businesses, our investors and the economy as a whole.”