Some Owners are Courting Foreclosure as Part of a Bigger Strategy
Posted on July 23, 2009
Filed Under Foreclosure Homes | 2 Comments
It is unbelievable but true that some owners are courting foreclosures by defaulting even if they can afford to pay. This is part of a bigger strategy. According to a recent study conducted by Booth School of Business (University of Chicago) and Kellogg School of Management (Northwestern University) 26% of the defaults on residential mortgages across USA are “strategic”. These are intentional to get out of loans by those owners who can afford payments but cannot manage the negative equity on their units because of fall in property value.
According to Zillow.com, 22% of all the homeowners had negative equity during the first three months of 2009. This means they had gone underwater – their loans being bigger than the worth of their houses.
In some pockets of Nevada and California, over half of all the houses have no equity. In some areas the size of this equity deficit is jumbo sized. For example in Salinas metro region the median equity of those who purchased their houses in 2006 (the height of the housing boom) is now minus $214,305.
An interesting study showed that generally and broadly speaking the people were moral and ethical in their approach saying that it was not right to walk away from a moral commitment. But when the problem came nearer home they balked and opted for just the opposite – not honouring the debt and walking away from the loan.
Paola Sapienza and Luigi Zingales together with Luigi Guiso interviewed 2,000 household in December and again in March to gauge of the “moral and social side” of planned defaults. The findings also showed the reason for the failure of the federal loan modification programmes and its inability to reach the required targets. 81% of those surveyed feel that purposeful default on mortgages are “morally wrong” but the percentage sharply falls with the increase in equity gap. When it touched $50,000, the mindset changed. 7% opined that they would walk away in such a grave situation. When negative equity reached $100,000, the walkers became 22%, at $200,000 it became 37% and at $300,000 it was 38%. The percentage was higher for those who had no moral compunctions.
The owner’s willingness to continue or discontinue with underwater mortgages was also tempered by other factors like age, period of ownership and intensity of foreclosures in the zip code of the person in question.
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