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Strategic Defaults Are Real, Growing, And Scary

The Key Factor Behind Strategic Defaults Then what is the decisive factor that causes a strategic default? To answer this, we need to turn to the other recent study. This past May, a very significant study on strategic defaults was published by the Federal Reserve Board. Entitled "The Depth of Negative Equity and Mortgage Default Decisions," the study was extremely focused in scope. It examined 133,000 non-prime first lien purchase mortgages originated in 2006 in the four bubble states where prices collapsed the most -- California, Florida, Nevada and Arizona. All of the loans had 100% financing with no down payment. These loans came to be known as 80/20s - an 80% first lien and a 20% piggy back second lien. It's hard to remember that those deals once flourished. The first conclusion to note is that an astounding 80% of all these homeowners had defaulted by September 2009. Half the defaults occurred in less than 18 months from origination date. During that time, prices had dropped by roughly 20%. By September 2009 when the study's observation period ended, median prices had fallen another 20%. The study really zeroes in on the impact which negative equity has on the decision to walk away from the mortgage. Take a look at this first chart which shows strategic default percentages at different degrees of being underwater. Read more:

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