Many property owners who are struggling to pay their mortgages in the US are deliberately walking away from their debts because of rising negative equity even although they can still afford to pay.
The disturbing new trend has been uncovered by researchers at the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management
They found that some 26% of defaults across the country are calculated economic decisions to bail out of loans by borrowers who could afford to make the monthly payments but can’t handle the negative equity caused by declining property prices.
Nationwide, some 22% of all homeowners are struggling with mortgage debts that exceeded their home values in the first quarter of 2009. In some parts of California and Nevada more than half of all households have negative equity.
In a few places the size of the equity deficit is staggering, the research found. For example in the Salinas metropolitan area in California the median equity for people who bought their homes in 2006 near the peak of the boom is now a negative $214,305.
It is the first time that attitudes behind the decision to walk away from home loan commitments have been examined. It has implications for federal policies seeking to limit the numbers of foreclosures which are continuing to rise in the country despite government stimulus plans. Experts predict a record 3.1 million filings this year.
Overall the research found that moral precepts keep large numbers of financially struggling homeowners out of default, but only to a point. Some 81% of household heads said they believed intentional defaults on mortgages to be morally wrong. But that high percentage begins to crumble as negative equity grows increasingly larger and debts impact household spending.
When negative equity rose to $50,000, 7% of those who consider strategic defaults to be immoral said they’d walk away. At $100,000 negative equity, 22% would do so. At negative $200,000, 37% of those with moral objections would nonetheless default, and at $300,000, 38% said they would.
Among those who had no moral reservations, the percentages were much higher. At $50,000 negative equity, 20% said they’d walk away. At negative $100,000, 41% would do so, as would 59% at negative $200,000 and 63% at $300,000.
Age was also a factor. Owners under 35 are less likely to have moral problems with strategic defaults. Also owners who know someone who defaulted strategically are 82% more likely to default themselves, compared with owners who do not know anyone in that situation.
It also found that as defaults become more common the social stigma attached reduces.
High numbers of foreclosures also appear to create a vicious circle that increases neighboring owners’ negative equity and greatly raises the probability of additional defaults, foreclosures and equity destruction in the area. The report concludes that the traditional assumption that borrowers default because they can’t afford their monthly payments needs to be re-examined in light of accelerating foreclosures in some markets combined with plummeting equity.