Strategic Defaults

The New York Times reports that the highest incidence of mortgage foreclosure these days involves loans in excess of $1 million. One in seven homeowners with big mortgages are "seriously delinquent" while only one in 23 borrowers with loans of less than $1 million are in the same category.

Those in the real estate business assert that the higher rate of foreclosure by wealthier individuals is not because they lack funds to make their monthly payments, as difficult as that may be. Instead, they have a greater willingness to walk away from a money-losing situation, just as they would dump any other investment gone bad. The article quotes Brent White, a professor at University of Arizona School of Law as saying “They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest.”

Lenders fear that if the less affluent ever come to realize that walking away from an underwater might be the best move long-term, the problems with our financial system will worsen substantially. For Massachusetts borrowers, however, this option might not be so attractive. In most of the rest of the country, home mortgages are non-recourse, meaning the borrower's liability on the loan is limited to whatever can be obtained by auctioning off the house. In Massachusetts, the lender may still look to the borrower's other and future assets to satisfy any deficiency the remains after the foreclosure auction.