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More Buyers Simply Choosing to Default on their Home Mortgage

published on March 5, 2008

As mortgage rates from subprime loans are beginning to reset and interest rates in general are beginning to increase due to the credit crunch, home owners are beginning to default in greater and greater numbers.  Many are simply abandoning attempts to pay back the money, and are simply letting their credit rating absorb the damage, as opposed to their day-to-day financial well-being. 

Indeed, while defaulting on a home loan is one of the worst things you can do to your credit score, being forced to declare bankruptcy from insurmountable levels of debt is considerably worse.  Furthermore, the overall effect bankruptcy can have on a person’s life can be considerably worse than defaulting on a home loan, as attempts to pay off the debt for years and years may eventually be met with failure, rendering the financial struggles of the past several years relatively worthless. 

Likewise, non-payment of numerous bills, such as credit cards and the like, can actually do more damage to your credit rating than a single foreclosure.  Last year a major consumer credit rating company found that many borrowers were recognizing this fact and choosing to pay such bills before they made payments on their home loans. 

Similarly, economic analyses by National City Corp. have shown that, while all credit metrics are declining nationally, mortgage delinquencies are rising faster than the rest.  Furthermore, there are some reports of new home owners skipping out on early payments even though they could ultimately afford to pay them. 

The Mortgage Debt Relief Act of 2007 also made it easier on the borrower to foreclose on a home.  Before the act was signed into law, if a bank sold the home the borrower had foreclosed on, the borrower would have to pay tax on the amount the house was sold for as if it were his or her own income.  With the law now on the books, defaulting borrowers will no longer have to carry the tax burden. 

These trends are likely to increase, and to be more prevalent in states where new home purchases are available with no or low-down payments.  In a rapidly shifting real estate market, it may actually make sense for some owners to foreclose on a home that was worth considerably more when they bought it than its current value would indicate. 

It is uncertain if this new type of behavior by borrowers is the result of changing attitudes towards credit scores, resulting from consumer’s long years of living with greater debt.  Many consumers, for instance, that have graduated college in the past decade simply do not know what life is like without significant interest-heavy debt hanging over their heads.  If this more callous attitude to their credit rating is partially the result of this trend, it may be the start of a larger shift in consumer attitudes.

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