Photo: Mike Licht
A new study, detailed in this blog on the Wall Street Journal, finds that one out of four defaults on mortgages is “strategic” - meaning that the mortgage-holder does not pay and goes into foreclosure even when he could have afforded his mortgage payments. This occurs when the negative equity in the home passes a certain threshold. In simple terms, if the homeowner is paying a mortgage based on an older, higher assessment of the value of his home, but that same home is now worth significantly less, he may walk away and let the bank have it - even if he could have afforded his mortgage. This finding may seem obvious to some, but its implications for how we view homeownership are not. We have always thought that in addition to serving as shelter, a house is purchased as a long-term, low-risk investment. It seems, however, perhaps due to the housing crisis, people are not so inclined to “wait it out”, and are pulling their money as soon as negative equity reaches 10%.
Another finding of the same study emphasizes the importance of your neighbors in your decision to foreclose - because of social stigmas, foreclosing is easier when many in your neighborhood have done the same. Aside from social stigmas, watching a neighbor default on his mortgage makes one more pessimistic about the property values in the neighborhood and therefore the value of his own home. The more people foreclose in a neighborhood, the more the social stigmas are loosened, and the lower the property values in that neighborhood become. These effects lead to a “bubble” in a given neighborhood, with several foreclosures leading to many more.
These two findings together show that the difficulty of affording a mortgage is only a fraction of the story and that a foreclosure is often no more shameful than withdrawing one’s money from a bad investment. In addition, foreclosures are much more a regional problem than an individual one - each zip code is at risk of experiencing its own mini housing bubble.
Comments
Very Good Topic. One that I hope you bring up again.
As a realtor, I think a lot of people purchased homes on the short term view:
"I'm only going to be here 5 years"
"I can resell for more in a couple of years"
"I can always refinance later"
Some of the above was possible for some people, but for the majority, homeownership is a 30 year commitment.
What ever happen to making a commitment?
Another underlining problem here, which is not always so clear is that when you become a homeowner, your spending habits have to adjust. People were not making the adjustments and combined that with sudden lost of employment, you have what we have now.
Homewoners that are overextended, discouraged and flat out dejected in some cases.
What happens to a nation when it becomes discouraged and unmotivated? . . .I personally do not want to know.
Those of us who made responsible purchasing were also effected. I bought what I could afford, while still extending myself slightly. Others bought what they couldn't afford and when everything fell apart they were the first to leave. The home prices fell and everyone who did 0% down , ARM, on a 40 year loan, left the market but of course these purchases caused the market to fly out of control, meaning what I should have gotten at a lower price resulted in buyers living in areas that have now been hit hard with foreclosures. The need to live in an area that is devalued and is now a rental property haven where questionable people now occupy, can not move out because short sales are vetoed by lenders. Commitment can also be applied to the lending practices to which California laws have now tried to protect owners from questionable preactices.
There should me no moral stigma. Where's the moral dilemma faced by banks that lent to people they shouldn't have - the people who couldn't afford their $600K home on a $75K income? The banks made VERY poor lending choices, and those of us that were responsible are now left with huge equity deficits (like mine - my house is now worth 42% of what it was when I bought it). The ability to be ABLE to pay your mortgage shouldn't mean you HAVE to pay it. A mortgage is a contract. In exchange for payment, I get the house. I don't want to make the payment, the bank can get the house. Why is it that people are held to moral obligations of keeping promises, but banks can get bailed out by the government and make poor lending decisions but have to answer to noone?
There is no moral issue here. The contract remains intact: Pay the money or hand over the keys. By handing over the keys, all commitments and contracts are upheld.
Any corporation would make the same decision. They speculate on real eastate and deliberately default when they realize it's lost equity. For some reason, individuals are held to a different standard than corporations. You have to think as if you life were a business and make the most economical decision.
Unless those who have a moral problem with my strategic default are willing step up and take on my negative equity themselves, they can keep their opinions to themselves.
Signing a mortgage is making a committment. A promise to pay what you have borrowed. It should not be considered the same as signing a lease that you can terminate and walk away from. After all, the lender doesn't ask you to turn over a percentage your gain when the value escalates. Just because it is secured by an investment that may see ups and downs in value doesn't change the fact that you have made a promise. The lender does not penalize you when the value increases. Why do you believe it is okay to penalize the lender when the value decreases? Both sides of the contract take risk. By walking away when you are capable of meeting YOUR OBLIGATION you are making an immoral decision. I hope you can sleep at night.
My husband and I bought our home expecting to spend a lifetime in it...we didn't get into a bad loan, an ARM, or an adjustable....we have a 30 year fixed at 5.4%. We put 20% down, money that we saved for many, many years . We did everything right. And because of greedy banks and irresponsible people getting into homes they couldn't afford, our home is now worth 50% of what we paid. If we are to expect the traditional 2-4% annual gains in equity, we could spend the next 30 years on this house only to break even. And we should TOUGH IT OUT...why should good people like us who have done the right thing be left holding the bag...for all the immoral people out there who participated in wrecking this economy. You sound naive on your high horse.
I bought a house with 50% down payment. It was estimated at 275,000 in 2006. Today it's estimated at 70000. My house hasn't changed, but it's price sure has. The real estate sales in my area were driven by investors from the New York metro area, and when their credit dried up, they vanished and left their homes down here in foreclosure. My house will be worth less than it's original sales price when I pay it off under any set of circumstances, not because of anything I did. The jerks that created this situation with their reckless 2nd and 3rd home buying binges will suffer no consequences and will retire early from their blue collar jobs with millions in home equity and benefits and be back to screw up our lives again, I'm sure. The way I see it, if you don't live in the North East, you're screwed. They are vastly under-worked and overpaid. Until that's brought in line, we're all just waiting for the next wave of crap to wash out of the North East.
I am reading allot of comments on the moral obligation of the repaying the Mortgage. My question to everyone who believes it is wrong,is do they understand fractional reserve lending? The bank lends 90% of the money out of thin air "so to speak" That means 90% of the interest you are paying to the bank is on illusional money. Fractional reserve banking is one the most immoral legal practices of our age. It is legalized slavery. If I knew that the bank wasn't lending me real money I doubt if I would have put 20% down of my "real" money. If you don't understand what I am talking about there is a good video on the net called "Money as Debt" google it and watch it a couple times and you will see why we are in a deflationary spiral that will only lead to the second great depression. Run don't walk from your underwater home. Don't feel sorry for the banks they are all crooks and they know it. It's just that they bought the government back on Dec 23, 1913 and now we are all paying.
GoodDay
Like the name says...no shame here...I'm just looking for a way to put off the foreclosure of my home for a few more months until my son is out of school so we can move over the summer break. We have not made a mortgage payment in 23 months!! We have almost got our down payment back. Frankly, I'm ready to move on< but the bank hasn"t really made a move. We just got a letter proposing a short sale. But now it's bad timing with my son in school...wow, I'm sounding pretty particular huh?! Any ideas on how to put off the foreclosure for another 7-8 months.
Just wondering.
jp morgan just defaulted on commercial properties in new york city . it was a stratergic default. what are their consequences?
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