More Homeowners Choose to Default on Home Loans

“Strategic defaults” are on the rise as more borrowers who are underwater on their home loans decide it’s not worth it to stay current on their payments each month. That trend could have repercussions for the housing market, and for borrowers, in the future.

Strategic defaults are when borrowers who owe more on their homes than they’re currently worth choose to stop paying their mortgage but continue to meet other financial obligations.

In other words, these homeowners neglect their monthly principal and interest payments, but still pay other bills on time, including credit cards and auto loans.

Growing social acceptance of this behavior could have ramifications not only for personal credit histories and the health of neighborhoods, but also for the future of mortgage lending, according to those studying the issue.

With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments.

A recovery in home prices could give people hope to stick it out and stay in their homes, even if they’re underwater. CoreLogic estimates that the typical underwater borrower is five to seven years away from regaining their lost equity.