From our friend Nick at the WSJ:
At what point do borrowers who owe more than their homes are worth decide to stop paying the mortgage?
A new study from economists at the Federal Reserve Board aims to answer that question. The research found that the median borrower who “strategically” defaults doesn’t walk away from the mortgage until the amount owed exceeds the value of the home by 62%.
(the new study uses -62%, JtR math shows $800,000 x -62% = $496,000)
The study is bad news for the mortgage industry in that it backs up the idea that a growing share of borrowers are walking away from loans. Concerns are mounting among lenders and investors that some borrowers who owe far more than their homes are worth are now choosing not to pay mortgages that they can afford.
But the silver lining here is that it suggests a rather high threshold for borrowers to walk away.
“The fact that many borrowers continue paying a substantial premium over market rents to keep their homes challenges traditional models of hyper-informed borrowers” choosing to simply walk away, the authors write. The results suggest “that borrowers face high default and transaction costs” that make strategic defaults less widespread than they might otherwise be.
From the latimes.com – click here for full article:
Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert home, even though she could afford the payments.
Bloch paid $385,000 for the two-bedroom in 2006, when prices were still surging. Comparable homes are now selling in the low-$200,000s. At 66, the retired psychologist doubted she’d see her investment rebound in her lifetime. Plus, she said she was duped into an expensive loan.
The way she sees it, big banks that helped fuel the mess all got bailouts while small fry like her are left holding the bag. No more.
“There was not a chance that house was ever going to be worth anywhere near what my mortgage was,” said Bloch, who is now renting a few miles away after defaulting on the $310,000 loan. “I haven’t cheated or stolen.”
Time was when Americans would do almost anything to hang on to their homes. But that commitment appears to be fraying as more people fall behind on their loans while watching the banks and lenders that helped trigger the financial crisis return to prosperity.
Nearly one-quarter of U.S. mortgages, or about 11 million loans, are “underwater,” i.e. the houses are worth less than the balance of their loans. While home values are regaining ground — median prices rose 10% in Southern California last month to $275,000 compared with a year earlier — they remain far below the July 2007 peak of $505,000.
Many homeowners are just coming to grips with the idea that prices will take years to reach the pre-crash peak: as long as 14 years in California, according to economist Chris Thornberg.
Stuck with properties whose negative equity won’t recover for years, and feeling betrayed by financial institutions that bankrolled the frenzy, some homeowners are concluding it’s smarter to walk away than to stick it out.
“There is a growing sense of anger, a growing recognition that there is a double standard if it’s OK for financial institutions to look after themselves but not OK for homeowners,” said Brent T. White, a law professor at the University of Arizona who wrote a paper on the subject.
Just how many are walking away isn’t clear. But some researchers are convinced that the numbers are growing. So-called strategic defaults accounted for about 35% of defaults by U.S. homeowners in December 2009, up from 23% in March of 2009, according to Luigi Zingales, a professor at the University of Chicago’s Booth School of Business.
He and colleagues at Northwestern University’s Kellogg School of Management reached that conclusion by surveying homeowners about their attitudes and experiences with loan defaults.
They found that borrowers were more willing to walk away if someone they knew had done it, and that the greater a homeowner’s negative equity the more likely he or she was to default, even if the monthly payment was affordable.
An analysis released last year by credit bureau Experian and consulting firm Oliver Wyman estimated that nearly 1 in 5 homeowners who were seriously delinquent on their mortgages in the last three months of 2008 were walkaways.
“The fact that people are strategically defaulting — there is no question,” Zingales said. “The risk that the number of people doing this might explode is significant.”
A flood of walkaways could damage the nation’s fledgling housing recovery by swamping the market with foreclosed properties. Still, some experts are dubious that millions of underwater homeowners will pull the plug as Bloch did. Homeownership remains the cornerstone of the American dream. Moving is a hassle. And the stigma associated with a foreclosure is likely to keep many hanging on for a recovery.
The biggest surprise is that so many underwater homeowners continue to pay, said White, the Arizona law professor. He’s convinced that personal shame, as well as moral suasion by the government and financial institutions, has kept many homeowners from walking away, even when they’d be better off financially by dumping their homes.
I could see this in Palmdale, or maybe Victorville…….but could it happen here?
An update on Flint, MI:
Then he looks at what’s left of the neighborhood – blocks lined with bruised homes and broken windows. Two streets over, someone has nailed a plywood sign to a tree: “No Prostitution Zone.” On three blocks of Jane, the city is targeting 14 homes for demolition, four of which have already been scarred by fires.
“My dad, he can’t come down this street anymore. … It’s too hard to see,” Kildee says. “Because his whole life was here.”
What was once Buick City is largely a cement prairie now, and General Motors, which once employed more than 80,000 in the city of its founding, has cut its Flint work force to about 6,000. Flint’s population, which peaked at 197,000, dwindled to 115,000 in 2007, and falling.
To stabilize the city, Kildee started the Genesee County Land Bank, which has taken title to 9,000 properties since 2002, tearing down 1,000 and selling or rehabbing others.
The foreclosure crisis has made the job even tougher, leaving the Land Bank with at least 1,000 more abandoned homes to demolish.