During past financial crisis, like we are seeing today in housing, borrowers have defaulted on loans, property has been foreclosed upon and the system slowly heals itself. Today, we are seeing a completely different attitude with a growing number of borrowers. This new group, which can afford to make their mortgage payments, is instead deciding to walk away from their financial commitments because they don’t want to pay for properties in which they have negative equity.
In past major downturns (think farms and oil patches in the 80s), borrowers only walked away as a last resort generally because they couldn’t pay because of unemployment, illness, divorce or some other life-altering changes which affected their income stream. Even then the number of “walk-aways” was small.
If this trend continues, it will dramatically impact the willingness of lenders to put their money at risk through mortgage financing. It will increase interest rates in that sector and make home ownership more difficult for new buyers for many years into the future.
I hope that those who are defaulting have a change of heart, recognize the sanctity of a contract and that prices go up and they go down but a deal is still a deal. Perhaps I’m too much of a hand-shake kind of guy.