The more a homeowner is underwater on their mortgage, the more likely it is they’re going to walk way from their loan despite their credit score, as Justin McHood recently wrote here at Mortgage Loan Place. 

Now, a University of Arizona law professor has a controversial take on strategic defaults, going so far as to suggest that homeowners should default on their mortgages and not feel bad about it.

“Millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages,” writes Brent T. White in his paper, Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis. “Homeowners should be walking away in droves. But they aren’t.”

White says many people continues to pay on their mortgage loans because they are concerned about the shame and embarrassment that comes with defaulting and going into foreclosure. He also says that a person’s credit will take a big hit after going through a foreclosure, but that shouldn’t keep him or her from strategically defaulting. 

“But assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 – within two years after a foreclosure,” he writes.

He even advises people to make large purchases, such as a car, another home, or other items they need to set up a new residence. ”Most individuals should be able to plan in advance for a few years of limited credit.”

Of course mortgage lenders and many others disagree with White’s advice. ”Borrowers who walk away from their mortgage obligations face serious consequences,” Fannie Mae spokesman Brian Faith told the Washington Post.  “There’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”

What do you think? Is White’s advice urging homeowners to strategically default irresponsible?

The term “Strategic Default” has been actively reported on for the last few months as more homeowners who can afford their mortgage payment just “walk away” for various reasons.

And the #1 reason they walk away is because they owe more than the home is worth.

And according to the latest research, the larger the negative equity, the higher the chance of someone defaulting on their mortgage no matter what their credit score is.

According to a story in the LATimes regarding the Strategic Default problem:

But research by three academics suggests that the willingness of people to default depends largely on just how far underwater they are. Or, as the study’s authors put it, “People default because of the size of their negative equity, not just because they cannot afford to pay.”

And when the shortfall is between 10% and 20% of their home’s value, Luigi Zingales of the University of Chicago, Paola Sapienza of Northwestern University and Luigi Guiso of the European University Institute found that just 5% of the owners they sampled would quit. Even when the difference reaches 50%, only 17% said they would throw in the towel.

And it appears that at least one factor when making the decision to default or not when you can afford your mortgage is how many of your neighbors are doing it.

Then there is something the study’s authors call a “multiplication effect,” meaning that the social pressure not to default is weakened when the borrower lives in an area with a large number of foreclosures. The predisposition to run away increases with the number of foreclosures in the same ZIP Code, the study found.

Lastly, many homeowners are finding that the banks are “just asking for more foreclosures” because they are not working with homeowners as much as they could.

Deede Wockenfuss of CybrSold Concepts in Chandler, Ariz., has had several clients who tried to no avail to work with lenders to get their loans modified. “The bank is asking the borrower to default,” she said.

When push comes to shoving your loved ones out the door, Bob Hunt of Keller Williams O.C. Coastal Realty in San Clemente says the moral duty to protect your family outweighs the moral duty to repay the loan.

Regardless of whether someone can afford to pay their monthly mortgage payment, one thing is clear: the more that their house is “under water” the greater the chance is of them defaulting.

No matter where they live.

Some homeowners who’ve had mortgage loans modified have ended up in foreclosure anyway. In many of those cases, people who got modifications experienced a drop in income due to a job loss and were unable to keep up with mortgage payments anyway, according to an article in the Record.

Economists now say unemployment is contributing to more people becoming delinquent on mortgage loans than sub-prime mortgages. Unemployment in the U.S. is currently at 9.8%, and more people are expected to lose jobs. Just this week, Johnson & Johnson announced it would cut up to 7% of its workforce, or about 8,000 jobs.

Although mortgage loan modifications have helped some homeowners, a new study from the Federal Reserve Bank of Boston says many mortgage lenders believe that they will recover more from foreclosures than from modified loans. That’s because about 30% of homeowners who are behind on mortgage payments are able to begin paying again without help from a mortgage lender.

The Fed study also says about 30% to 45% of people who have mortgages modified are likely to end up missing payments again. Loan modifications simply postpone foreclosure for some people, the study says, and mortgage lenders end up recovering less money when those homes eventually end up in foreclosure.