Saturday, May 1, 2010

Willingness to Walk Away: Strategic Default on the Rise

Building on previous research, Paola Sapienza and Luigi Zingales:

...found that the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009.

One likely reason for this growing trend is the increasing perception that lenders are not going after borrowers who walk away. In December 2009, the average homeowners surveyed said the probability that a lender will go after a borrower is 56 percent, as compared to 54 percent reported in March 2010.

“With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments.” said Sapienza.

The growing importance of strategic defaults is in line with the recent Obama administration’s new set of housing initiatives.

The results also indicate that the likelihood of strategic default increases by 23 percent when homeowners learn that their neighbor with negative equity has received a partial loan for forgiveness. Additionally, strategic default increases by 29 percent if homeowners are able to find an alternate way to finance a new home.

“A key deterrent to strategic default is the fear of losing a good credit score,” said Zingales. “Approximately 74 percent of homeowners in our survey believe it is very important to maintain good credit and this can be a factor in encouraging them not to walk away.”

These findings build upon a paper the researchers released in June 2009 entitled “Moral and Social Restraints to Strategic Default on Mortgages,” which looked at American homeowners’ propensity to strategically default. The paper was the first to analyze and quantify the extent of strategic default during the current recession.

2 comments:

  1. Walking away from your mortgages isn't about covering up your temporary losses, but it is about running from your moral obligation and ruining your credibility as a seller in the future. As an employee of a mortgage company (Calgary) in Canada, it is your moral obligation to pay your mortgages since you've signed a contract with a company and this is also the same thing with engaging into mortgage investment (Calgary).

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  2. The motivation for a strategic default may depend on how far a borrower is underwater.
    Having a mortgage that’s twice as much as the value of a home could be somewhat discouraging.
    The prospect of being stuck with a losing investment that may not reach a break-even point for 10 years or more may be enough motivation to take a walk.

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