Some homeowners see strategic default as only solution

BALTIMORE — The moving truck pulled away from the curb, loaded with Wallace Farmer's possessions. He locked the front door for the last time and left town — clutched by a long-simmering anger that finally gave way to relief.

Farmer didn't sell his Baltimore house, worth far less than the $180,000 he paid in 2006. And he didn't lose it to foreclosure. He walked away from the rowhouse and the mortgage. It's the bank's problem now.

"These lenders, they don't care about the community. They care about their shareholders," said Farmer, 42. "I'm my only shareholder, and I have to look out for myself."

Hundreds of thousands of Americans — perhaps as many as one in eight borrowers behind on payments in recent months — have done the same, researchers estimate. Criticized by some as immoral, hailed by others as righteously logical, these "strategic defaulters" have launched a national debate about the right and wrong of personal finance in the wake of the worst housing slump since the Depression.

The homeowners walking away are trying to cut their losses, financial and emotional. But their decision also ripples outward, critics say, undermining neighborhoods, hurting banks and putting the struggling economy at risk.

No one's taking a census of walkaway borrowers, but estimates suggest a ballooning trend rather than a trickle. About 350,000 mortgage defaults in the first half of last year were "strategic," up more than 50 percent from a year earlier, according to a recent analysis by consulting firm Oliver Wyman and credit-reporting agency Experian. A separate study by analysts at financial services firm Morgan Stanley said these defaults rose from "insignificant levels" in mid-2007 to about 12 percent of all delinquencies in February.

Definitions vary. The Morgan Stanley analysts flagged mortgages that were higher than the home value and whose borrowers were up-to-date on their credit card bills and other non-mortgage obligations. (That's true of Farmer, who paid off his credit card balances this year.)

Few would care about strategic defaults if walkaway borrowers and their lenders were the only parties affected. But homeowners can't do anything in a vacuum. Foreclosures decrease nearby home values and destabilize an already struggling housing market.

While acknowledging that strategic defaults can be in the best interest of the defaulters, mortgage financier Freddie Mac argues that these ex-homeowners "deplete the personal wealth of their neighbors" and give lenders reason to increase the cost of borrowing for everyone.

"In the end, borrowers considering a strategic default should recognize the damaging impact their actions can have on others," Donald J. Bisenius, a Freddie Mac executive, wrote on the company's website.

Luigi Zingales, an entrepreneurship and finance professor at the University of Chicago, thinks walkaway borrowers also underestimate the hit they personally could take. Many states allow lenders to sue borrowers for repayment when a foreclosure sale doesn't cover the mortgage balance. And there are other consequences.

"Banks will refuse to lend to people who have strategically defaulted, landlords will be leery of renting them apartments, and even potential employers or business partners will steer clear out of concerns about the reliability of those who don't honor their promises," he wrote in the urban policy magazine City Journal.

Others say it's unfair to hold homeowners to a higher standard than corporations, which strategically default on properties without cries of moral turpitude. Brent T. White, a law professor at the University of Arizona, has repeatedly argued that walkaway borrowers are merely opting for one of the two options everyone understands when they take out a mortgage — pay up or relinquish the property.

"The lender already agreed to it, so no one should be surprised," said Jon Maddux, chief executive of, a California firm that monitors clients' foreclosure cases and connects them with legal help.

Maddux says some of his clients can afford their mortgage. Others are walking because they have nothing left over after their monthly payments to sock away in savings — or are tapping their savings to make the payments.

"Many of our clients could rent a house (for) half the payment they have," he said. And once they switch to renting, "they don't have to worry about fixing the roof or the toilet if it breaks."

He takes a dim view of the contention that strategic defaulters are harming their former neighborhoods.

"The neighborhood got hurt because the lenders loosened the guidelines and made false values happen in the housing market," he said.

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