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.