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Friday, March 12, 2010

Strategic Default Like Pre-'70's Divorce?

From Stigma to "the Norm"

I was at an industry conference yesterday where the speaker compared "strategic default" -- making a business decision to walk away from an "underwater" mortgage -- to society's notion of divorce up until the 1970's.

Back then, relatively few people divorced, so there was a stigma attached to it.

Fast forward a couple decades, when more than half of all marriages end in divorce.

Voila! No more stigma.

Similarly, "strategic default" is a big deal -- until everybody does it.

With millions of homeowners deeply underwater in markets like Las Vegas, Southern California, and Arizona, you'd guess that a similar evolution is in store for the housing market.

And yes, if enough people strategically default, you'd expect the lending rules to change: the same speaker speculated that FHA will face pressure to reduce its "rehabilitation period" for defaulting borrowers from the current 7 years to 3 years.

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