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.
Copyright 2009 Richard P. Zaretsky, Esq.
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
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