As you might expect, lenders in the
USA hate the fact that a person can choose to walk away from their mortgage. There is no law against doing it. These lenders are lobbying HARD to get the rules changed so that people dont have an incentive to walk away. For example, theyd like it if a strategic defaulter couldnt get another loan for 20-30 years instead of 3-7 years. That would prevent a lot of them from doing it.
Its not easy to prove strategic default though - youd need to show beyond a reasonable doubt that the person wasnt suffering financial hardship when they stopped paying their mortgage. Imagine a bank trying to do that to 5000 customers. Better still, imagine a state court system trying to handle 10 banks doing it to 50,000 customers.
Additionally, nobody knows what percentage of people are defaulting because theyre broke versus people defaulting because they dont feel like repaying a debt bigger than the value of their home. Come to think of it, there isnt even an official definition for a strategic defaulter.
One thing is for certain though. With the previous chaos in the market abating and the supply of distressed stock dwindling (see graphs above), they represent one of the few ways which will continue to generate discounted houses that investors can pounce on. The flip side is that if it becomes too big a problem, I think loop holes will be closed and people will no longer be incentivised to do it.
Dont expect the authorities to announce a date for closing these loopholes either - theyll just do it and tell you afterwards. Otherwise, people would simply rush to default before a deadline.
So, I think I can safely predict that when banks finally restructure their
property portfolios and the levels of foreclosures slow to a manageable trickle, theyll start lending to normal people again. Thats when property prices in the popular areas will start increasing and that could conceivably happen this year.
