Study: One in Four Mortgage Defaults May Be ‘Strategic’ - Developments - WSJ
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JULY 13, 2009, 11:47 AM ET
Study: One in Four Mortgage Defaults May Be ‘Strategic’ One problem that’s vexed policymakers addressing the home foreclosure crisis is the degree of uncertainty over how many mortgage defaults are strategic—in other words, how many borrowers are skipping their mortgage payments even though they’re able to pay the bills? A new study, which sampled two groups of 1,000 households each, found that some 26% of existing defaults are strategic. The main drivers for those defaults are the severity of a borrower’s negative equity, where a home is worth less than the value of its mortgage, and moral or social considerations, according to the study by Northwestern University’s Kellogg School of Management and the University of Chicago’s Booth School of Business. Researchers found that almost no homeowners would default if their equity shortfall was less than 10% of their home’s value, but one-in-six homeowners would default if their equity shortfall reached 50% of their home’s value. While four out of five homeowners said they believed it was morally wrong to intentionally default, as negative equity rises, more borrowers—including those who said strategic defaults were immoral—would consider walking away. With negative equity at $50,000, 7% of homeowners who said such defaults are immoral would walk away, compared to 20% of homeowners who had no moral objections. At $100,000 of negative equity, that percentage rises to 22% among those with moral reservations and 41% among those without. At $200,000, the percentages grow to 37% and 63%, respectively. Well-educated borrowers, homeowners in the Northeast and West, and people under 35 or over 65 were less likely to have moral reservations about choosing to walk away from making mortgage payments. The study also found that borrowers become more willing to default as the proportion of foreclosures rises in their ZIP code. Researchers conclude that “the correlation between willingness to default and percentage of foreclosures is likely to derive from a contagion effect that reduces the social stigma associated with default as defaults become more common.” Policymakers are likely to shape their responses to the foreclosure problem depending, in part, on why they believe homeowners default. While the authors don’t offer their own policy prescription, they note that so far, most of the solutions by the Bush and Obama administrations have tried to address the problem of mortgage payments that are too large. The authors argue that the growing problem of negative equity (nearly one-in-five households have mortgages that exceed the value of their homes) may require some rethinking in addressing the foreclosure crisis. Readers, what do you think? Are policymakers underestimating the risks of growing negative equity?
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7/14/2009