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| Borrowers have become much more comfortable walking away from mortgage payment obligations on their homes and letting their lenders suffer property-value losses, a recent study suggests.
The practice of walking away from a negative equity position has been dubbed “strategic default.” Such defaults account for an estimated one-quarter of all defaults. “Given that homes in numerous parts of the country have lost more than 30 to 40 percent of their value, many homeowners say they would simply walk away from their loans — without fear of repercussion,” according to the report, Moral and Social Restraints to Strategic Default on Mortgages, jointly announced last month by the Kellogg School of Management and The University of Chicago Booth School of Business. The research found that borrowers were not inclined to strategically default if they had negative equity of no more than 10 percent. But once negative equity reached 15 percent, “homeowners start to default at an increasing pace, and walk away massively,” the authors wrote. The report indicated that an estimated 17 percent of all borrowers would walk away if their negative equity reached 50 percent. The chances of a strategic default increased 82 percent if the borrower knew someone else who did it. Another factor present with higher rates of borrowers who would walk away was a high level of foreclosures in the same zip code. Among the groups who were less likely to think it is morally wrong to strategically default were people under 35, people over 65 and those with higher education, according to the survey. Blacks and supporters of government intervention were also less likely to oppose the practice. But the report indicated little difference between Republicans and Democrats, though Independents were less likely to oppose defaults. “Housing policy under the current administration has focused on reducing households’ cash-flow problems in response to the housing crisis, but no one has addressed the negative equity issue as part of public policy regarding housing,” Kellogg School’s Paola Sapienza — who lead the research — said in a statement. “We’re in a completely different economic environment today, where for the first time since the Great Depression millions of Americans have mortgage loans that exceed the value of their home.” |
