“Strategic defaults” on mortgages are becoming more common as Americans become increasingly likely to decide that they can lose less by not paying their overdue mortgages, according to a Morgan Stanley report.

The report says that 12% of mortgage defaults made in February were strategic, or planned. The definition of a strategic default, according to Morgan Stanley, is a scenario in which homeowners neglect their mortgage payments while continuing to pay credit card bills and auto loan payments.

While some economists have argued in the past for the value of strategic defaults, some feel the surge in strategic defaults could harm neighborhoods and the housing market.

Why doesn’t everyone just default?

According to a February study by University of Arizona professor Brent White, too many underwater homeowners continue to make mortgage payments, despite the fact they “have no reasonable prospect of recouping their losses.” They don’t do it because it would harm their finances, either.

In White’s estimation, continuing to pay when you could just as easily default is a mistake. In California and Arizona, for instance, lenders cannot win judgments in court against defaulting homeowners. Therefore, White said those homeowners who continue to pay do so because they do not want to face the shame of guilt that comes with foreclosure or the perceived consequences of foreclosure.

“Fear, shame, and guilt are not mere ‘transaction cost’ that homeowners calculate according to their own personal tolerance for each,” Rogers said. “Rather, these emotional constraints are actively cultivated by the government, the financial industry, and other social control agents in order to induce individual homeowners to act in ways that are against their own self-interest.”

Rogers said that despite the manufactured guilt associated with defaulting on a mortgage, continuing to make payments is not actually socially responsible. His study said that homeowners often “tend to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision.” Under the current system, the industry has power over consumers.

When it makes financial sense to default

If you are more than 25% underwater on your mortgage, it is completely rational to walk away from the mortgage, according to White.

If you owed $315,000 on a house that depreciated to $225,000 and your payment is $2,600 a month, it would make sense to walk away. If you could rent an apartment for about $1,500 per month, you could have saved more than $80,000 via strategic default over seven years.

If you stayed in your home, even if the house started to appreciate at 3% per year, you could eventually come back above water after seven years. But by that time, you would have paid more than $200,000 in loans to barely break even on the cost of the home.

The downside of foreclosure

Some experts argue that as more people choose to strategically default on homes, it becomes socially acceptable. Generally, foreclosures harm neighborhoods by dragging the price of nearby property down.

The more strategic foreclosures occur in a neighborhood, the more appealing the option becomes to other people who watch their neighbors get out of loans without major penalty.

Some experts also think it is almost always possible for homeowners to return their homes to positive equity if they stick with their payment plans long enough. According to financial information gathering agency CoreLogic, it generally takes anywhere from five to seven years for the typical underwater mortgage to return to viability.

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