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WALK AWAY FROM THE PROPERTY - STRATEGIC MORTGAGE DEFAULTS GROW TO 26%

A mortgaged homeowner is likely to "walk from the property" or "give it back to the bank" based more on loss of equity than the ability to make the mortgage payments, a recent research paper emanating from the University of Chicago says. The paper researches and analyzes when American homeowners are likely to "walk away from their mortgages". These actions by mortgaged homeowners when the indebtedness substantially exceeds the equity value of the property, is called a "strategic default". The study found that 26% of all homeowner defaults today are strategic defaults.

The paper preliminarily released through the University of Chicago and Northwestern University in June, titled, "Moral and Social Constraints to Strategic Default on Mortgages", examines the likelihood and reasons for an indebted homeowner to either pay or default on its mortgaged property and makes for fascinating reading. It is also an excellent background source to my recent blog SHOULD I PAY MY MORTGAGE?

Key findings in this study include:

- 1 out of every 4 mortgage defaults is "strategic", meaning the borrowers are intentionally not making payments based upon valuation of the property, rather than personal finance.

- When negative equity reaches 10%, strategic decisions to default begin.

- Significant defaults begin when the negative equity reaches 15%.

- 17% of homeowners will default even is the home payments are affordable, when the negative equity reaches 50%.

Neighborhood and demographic environment plays a multiplication or magnification effect on the statistics. In fact the study found that besides relocation costs, the most important variables in the prediction process are moral and social considerations. For example, if a homeowner lives in a community where there are several foreclosures, or has acquaintances that are in foreclosure, the homeowner is more likely (82%) to have a predisposition to strategically decide to allow a foreclosure. If the homeowner finds it immoral to default, they are 77% less likely to default.

The study also takes into consideration the morality of purposely not paying the mortgage, which summarily is only(?) 20% of all mortgageors.

People under 35 years and over 65 said were less likely to say it was morally wrong to default, compared to middle-aged respondents.
People with a higher education and African-Americans are less likely to think it's morally wrong to default, while respondents with higher incomes were more likely to think it's morally wrong.
Republicans and Democrats showed little difference in moral views of strategic default, while independents were less likely to say defaulting is immoral.
People who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral.

The study also takes into consideration the possibility of recourse versus non-recourse mortgages and deficiency judgments in its statistical analysis. See also FORECLOSURE DEFICIENCY JUDGMENT or SHORT SALE PROMISSORY NOTE or BANKRUPTCY - REVISITED. There is an analysis of this issue (which applies to some mortgages in California or example) that is very interesting - as there is not the impact one would think on the determination of the homeowner.

This study makes an interesting juxtaposition to the federal government's moves to address the problem of foreclosures in our nation through addressing the cash flow and affordability of payments, rather than the equity value losses of homes. It is a must read for those involved in short sales and mortgage modifications.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at Need Short Sale and Modification Information? - These Articles Probably Answer Your Question

Posted by Richard Zaretsky, Florida Real Estate Attorney on 07/06/2009 06:19 AM

Comments (17)

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17 Comments on WALK AWAY FROM THE PROPERTY - STRATEGIC MORTGAGE DEFAULTS GROW TO 26%

JUL

I believe all of what you are saying. Why should you pay more for a house than it will ever be worth especially if you are struggling financially.

I am working with a home buyer right now who is 6 months behind on his mortgage. The home had been rented and the homeowner was forced to evict a non-paying tenant. When the tenant finally left, the house was left in disrepair and the homeowner was left with thousands of dollars in needed repairs.

In it's present condition, the house is worth roughly $50,000 less than the mortgage balance amount. The owner has attempted to work with the mortgage company, but to no avail. He is now being advised by other realtors and appraisers to walk away form the home because it's a no-win situation.

This is the typical story in my area and everythwhere else I'm sure.

Interesting motivations for people who strategically default. Like comment 2 above tenants trashing the place, or stealing everything including the a/c and the shrubs could drive an owner to default. Or, damage from a natural disaster, say, Hurricane Ike. Hard to recover financially from that.

That is why I am a fan of the short refinance.. I think they will help homeowners stay in their homes..and let the banks keep the loans..at least they get something out of it.

Richard,

Thanks for posting this, we need to see it.

It amasses me that people will default because of negative equity when they can afford the payments! While this may be PC, it makes little sense. The alliterative is normally a lesser rental at a higher price!

If home owners would continue making their affordable fixed payments they would eventually pay off the property at the time they origanly planed! Renting on the other hand will mean ever increasing cost, loss of tax benefits, and loss of security! A tenant can be evicted in some states in as little as 5 days.

The PC's tell us to stick the bank, we were cheated, Obama paid the bank, all based on hate an ignorance! The PC's have no concern for the consumer. If you can't afford the payment and can't sell "strategic default" may be a good idea it may be inevitable, but defaulting on an affordable payment is simply stupid!

Bill

Interesting Richard. I assume that those owners with investments and/or a portfolio would be at risk for summary judgment. Of course, these days not that many with investments.

Richard,

This goes to show you that people over extended themselves to begin with!!! If you make the payments as agreed upon from the begining to the end the house is yours? Why would you want to rent if you can still make your payment!! Are you not renting now from the bank?

Wow, those are quite the numbers!

Broker Bryant linked to this post & raised the morality point...I agree that it makes financial sense to walk away, but you have to consider the moral implications of walking away from your commitments.

I don't get it. So I guess it's OK to stop paying all personal debt if the stuff you bought with the money went down in value. Would it be OK to stop paying on medical bills? You already received the services so why should you be obligated to keep paying for something you already used?

This will just push mortgage rates higher. Who is going to lend money at low rates when such attitudes start becoming common place? I know I wouldn't.

Hi Richard, Thanks for reposting this. I didn't like not being able to link to it in my posts.

I knew a couple of years ago that this new wave of defaults would be upon us. Folks can argue morality all day long but the bottom line is that very few people will continue to pay when they are 70% upside down. It would be different if you could stop the bleeding but you can't. The banks will continue to drag values down by throwing REOs on the market at ridiculous prices.

JUL

I think what is bringing down prices in not banks throwing homes on the market, after all, the only homes they have are ones that were in default on the mortgage... what will bring housing prices down further is exactly this sort of logic: If you are underwater, dont pay. The resultant huge inventory of houses in forewclosure is bringing housing prices down. Strategic defaults are no less responible for this than unintentional defaults. In fact, likely more so, as these are intentional, whereas the others are for lack of employment, etc. I cannot balme someone for defaulting on a mortgage when they lose the jobs and their savings (via investments that included mortgage backed securities) but I can blame someone who suddenly thinks the house they purchased is no longer worth what they paid, and so decide to default. Moral issues cannot be divorced from financial ones in this instance... yes, people may ignore moral issues, but that does not make it right...

Bryant: If you are going to say it is okay to strategically default, dont blame the banks then for marketing foreclosed properies they take back from owners because of "strategic default"... these properties end up on the market too, and it is not because banks are bad players... it is because of the defaults... this exacerbates the issue, and should be seen as doing so. Strategic Default is theft, plain and simple. Because of things like this, shareholders in many banking and investment houses have lost huge money... so these defaults are in some ways very similar to what Madoff did... If you bought a house at a bad time, then live with it, or pay the penalty.

Interestingly, the number of REO's on the market in South Florida was recently reported to be only a small (10%) of the total REO inventory. Thus it appears that the lenders are withholding inventory from the market to try to sustain some sort of market stabilization.

JUL

The only solution to this is for the deficiency on the REO sale to follow the borrower and his/her succesors. There is no other way to stop this, because now this is an action with no reaction.

Our country has a huge accountability issue, no one is accountable.

JUL

Morality. Strategic default. Two considerations of mine at this exact moment.

Richard, thank you for this enlightening report.

My quest for mortgage modification is reported here < http://activerain.com/blogs/grupomcnulty > I am "current" on my loan and want to stay that way. But if it takes strategic steps the door may be opened. Just as in the example of the person who stops paying the loan to pay the taxes and to provide food for the table. Then that person stops paying the taxes to provide food for the table.

Sure hope the mod option works for me.

John Sweeps McNulty

SEP

Morality is a funny thing. It applies to all equally.

Was it moral for the government and various financial institutions to create the bubble market in the first place?

Was it moral for all that worked in the housing industry to go along for the ride and enjoy the increasing levels of commission and related revenues when many silently had misgivings about the sustainability of the process?

And where is the morality within the housing appraisal business? Did anyone really attempt to tie values to anything land based or is the game setup to just do comparables until the trees grow to the sky?

I left Florida in 1997 and by the time I returned in 2006, I could not afford in any traditional way to move back into the neighborhood I left. Think about that for a few minutes. After almost 10 years of hard work and increasing pay and responsibilities, my next move was down when it came to my living standards.

I understand why good folks are walking. In my case it feels like I played by the rules and now face a $200k penalty because I was the last guy into the Ponzi Scheme. I'll continue to pay and will eventually own my home. But it sure would be nice if some of the other players in this little drama would accept responsibility in a moral, meaningful way.

Jeff - you got it right - but not the end -- you probably mean a "pyramid" scheme.

OCT

Richard - thank you for linking to this. I'd missed it previously.

I wonder how those who have little to no moral issue with ceasing payments when they're upside down handle car payments? If they buy new, in pretty much every case, they're upside down the moment they drive off the lot. So, do they stop paying?

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