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Strategic Defaults Not Going Away Anytime Soon

I’ve been blogging about results from our latest quarterly survey of US bank risk officers – specifically how they expect loan delinquencies to drop and credit availability to expand.  Today, I’ll focus on survey results from the housing sector.  Notably, nearly 2/3 of respondents think strategic defaults will be as big a problem – or even bigger – in 2012 than in 2011.  Some 46 percent expect the volume of strategic defaults to increase in 2012, while another 19 percent expect the number to stay the same.

After five years of a brutal housing market, many people view their homes more objectively and with less sentimentality.  That isn’t surprising when as many as 1 in 4 homeowners are underwater.  Regardless of legal or ethical issues around strategic defaults, mortgage lenders and servicers must account for this risk.  It’s clear that many homeowners who find themselves upside down on mortgages consider strategic default as an acceptable exit strategy. 

Concerns about strategic defaults were also reflected in response to a survey question about the consumer payment hierarchy.  When we asked if the current generation of homeowners considers their mortgage to be their most important credit obligation, 49 percent of bankers said no.  Only 29 percent said yes.

Despite worries about strategic defaults, other signs in our survey point to a growing sense of stability in the housing market.  Twenty-six percent of respondents expect mortgage delinquencies to decline in the coming months.  While this isn’t great, it is higher than at any previous time in the two years we’ve been conducting the survey.  Furthermore, 53 percent said the housing market will improve by the end of 2012, compared to 24 percent who said the market will deteriorate.

Ultimately, when bankers are truly convinced that the housing market is back, we should see a strong uptick in the supply of mortgage financing.  I don’t think we’re quite there yet.  A majority of survey respondents (56 percent) expected the supply of credit for residential mortgages to fall short of demand over the next six months. This number is higher than over the past couple years, but there is clearly still some hesitancy among lenders to expand mortgage lending.

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