What is strategic default?

Not everyone even defines strategic default in the same way, but panelists were generally in agreement that it involves a borrower who has the ability to pay his or her mortgage but chooses not to. Often that decision is tied directly to the property being underwater — when the borrower owes more than what the home is worth.

How many strategic defaults are occurring also is the subject of much debate. Last week, Barclays came out with a report that suggested that strategic default estimates have been largely overestimated.

But Amit Seru, assistant professor of finance at the University of Chicago and a member of the panel, classified it as a growing and significant problem.

About 4% of defaults in 2004 were strategic defaults, and now 25% to 35% are, he said, basing those figures on various academic studies that used both survey-based and data-based methods to assess the problem. House price declines, coupled with higher credit scores and borrower wealth tend to increase the likelihood of strategic defaults, he said.

Seru said if servicers are able to separate out distressed defaulters from strategic defaulters, then they could use different strategies to handle each.

From the government-sponsored enterprise standpoint, Fannie Mae uses deficiency judgments as one method to discourage strategic defaults, said Steve Holden, vice president of credit loss mitigation analytics at Fannie Mae. The GSE relies heavily on its servicers to determine if a borrower is a strategic defaulter and then makes a determination whether to seek a deficiency judgment, he said. After the session, he told HousingWire that he was unable to comment on how many deficiency judgments the GSE has pursued.

Davis said he predicts that more and more servicers will begin to pursue judgments against strategic defaulters although Lockett said it still needs to be a case-by-case review on whether to go that route. Davis also said that servicers should sit down and negotiate with borrowers who want to do short sales to potentially collect a deficiency payment at that time.

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