Dump the House, Take a Vacation, Just Treat Yourself…

How many of our nation's 7.4 million mortgage deadbeats are defaulting just for the chance to take a dream vacation?

Edward Harrison at Naked Capitalism probes the question of why savings rates are dropping at the same time mortgage defaults are either finishing or still in the middle of a historic increase. His tentative conclusion: "[P]eople are defaulting and that is boosting spending."

This issue, I think, falls into the category of unknowable unknowns. The differences in scale and data collection points make it unlikely we'll get a final answer to the question of whether strategic defaults (mortgage deadbeating by people who still have the means to pay) are actually juicing retail sales at this point in history.

But Harrison's anecdotal evidence is pretty entertaining. Naturally, these anecdotes come mainly in the form of readers complaining about what pieces of human waste their relatives and/or in-laws are, and the overriding theme is that all these people are not just skipping out on their debts but either A) still living in the house as banks fail to foreclose, or B) using their newly disposable income to take vacations, or C) both A and B. To add to the anecdotes: I have at least two acquaintances in category C. (Though I rarely have a good word for my own family, nobody I am related to by blood or marriage is currently deadbeating on a mortgage.)

Harrison lays out the temptation:

Basically, someone strategically defaults because one finds oneself in a situation in which repayment no longer makes financial sense. For example, you buy a house for $400,000, $40,000 in cash and $360,000 as a mortgage. The value drops to $300,000, so you are now 20% underwater and rentals are half the price of your mortgage payment.  Meanwhile your repayments are 60% of income and you and your spouse have two children to take care of.

As always when I've read any of these hard-luck scenarios over the past few years, my only response is: I should be so lucky. I can't even default because I'm above water and my remaining principal is much less than the bank (or I) could get for the property.

And yet I know exactly the feeling of wanting to dump the property and take a vacation. I keep thinking I should just accept that whenever I sell is when the real estate bottom will be, take the change, lease an RV, and drive these United States like Albert Brooks. But then, to do that you need a nest egg: