The Rising Tide of Strategic Defaults in Non-Recourse States

I just came across a very interesting article that forecasts the number of homeowners underwater will rise from 14 million today, to 20 million by the end of 2011. It also points out a correlation between the rates of strategic default, a borrower’s credit score and the state of residence (recourse vs. non-recourse).

Excerpt From the article:

Deutsche took a closer look at the impact of non-recourse legal provisions on a homeowner’s decision to strategically default and concluded that states that do allow recourse have lower rates of strategic defaults. Even in recourse states, Deutsche bank found that “actual deficiency judgments are rare in practice because they are often costly and time-consuming.”

To do this study, the bank looked at California and Arizona (non-recourse states) versus Florida and Nevada (recourse states). It found the rates of default about 15 percent to 20 percent higher in the non-recourse states. When a home was underwater by 130 percent, there was an 81.3 percent cumulative default rate in California and Arizona. At the same loan-to-value, the cumulative default rate was 62.7 percent in Florida and Nevada. Even though recourse is a deterrent, that’s still a high rate of default.

But Deutsche Bank also found that recourse is “generally a larger deterrent on borrowers with more negative equity.” So the more that borrower could owe after default, the greater the chance the borrower will delay the default.

Click here to read the full article.

Speare Valasakos
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