Monday, June 29, 2009

Is It Okay To Not Pay The Mortgage If You Are Significantly Underwater?

With large numbers of homeowners in the US underwater on their mortgages, more individuals are choosing to walk away from their mortgage even if they can afford to pay it. It may make financial sense if mortgage principal is $500,000 when the home is valued at $400,000, but is it right to not pay back a loan under these circumstances? The following post from The Mess That Greenspan Made, explores that question.

The Economist looks at the phenomenon of U.S. homeowners who can pay their mortgage, but who choose not to. Apparently, changing cultural norms are playing as big a part on the way down as they did on the way up for the U.S. housing market.

New research based on a survey of 1,000 homeowners suggests that one in four mortgage defaults are “strategic”—by people who could meet their payments but who choose not to. The main drivers of strategic default are the scale of negative equity, and moral and social considerations. Few would opt to renege on their mortgage if the equity gap were below 10% of their home’s value, the authors find, partly because of the costs of moving. But one in six would bail out if loans were underwater by a half.
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Anger about bail-outs of banks or carmakers does not weaken the moral barrier to default. But people who live in neighbourhoods where home repossessions are frequent are more likely to welsh on loans. Homeowners who know someone who has defaulted strategically are 82% more likely to say they would do so, too. The likelihood of strategic default rises more quickly once the rate of local home foreclosures reaches a critical level. That hints at a vicious cycle of foreclosures that both depress home prices and weaken the social and economic barriers to further defaults.

Cocktail party chatter sure has changed dramatically in the last four or five years - from discussions of "$10,000 a month in appreciation" to how to "walk-away".

This blog post can also be viewed at The Mess That Greenspan Made.

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