Tuesday, May 04, 2010

The Take Away About Walking Away

More and more Americans are walking away from their mortgage obligations. A report released by Morgan Stanley indicated that more homeowners are defaulting on their mortgages even though they can afford to pay the loans. According to the New-York based global financial services giant, around 12% of the total number of mortgage defaults in February were “strategic,” up from only 4% in mid-2007.

The report stated that homeowners are more likely to default on their mortgages the higher their credit scores and the larger their loans. It notes that strategic defaults rise based more on how much more borrowers owe in housing debt than the price of their homes.

Industry experts have warned that borrowers who default on their mortgage pose a big risk to the housing market. Morgan Stanley’s report, however, acknowledged the efforts by the Obama administration to address the issue of rising mortgage defaults. The federal government’s policy change “gives us hope that policymakers are serious about curbing future strategic defaults,” the report said, referring to Washington’s plan to amend its anti-foreclosure program to encourage cuts to borrowers’ principal amounts, instead of just the payments they make. As many as 12 million foreclosures will hit the housing market over the next few years if lenders fail to effectively adjust borrowers’ debt.

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