The number of homeowners deciding to throw in the towel even though they can afford to pay their mortgage is growing, according to two new industry studies. Still-falling property values are pushing more homeownersunderwater, and the social stigma attached to foreclosure is steadily eroding as delinquencies become almost commonplace – such factors are giving rise to so-called strategic defaults.
Researchers at the University of Chicago and Northwestern University found that the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, has dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009.
According to their study, one likely reason for this growing trend is the increasing perception that lenders are not going after borrowers who walk away. In March 2010, homeowners surveyed said there was just a 54 percent chance that a lender would pursue them if they default on their mortgage.
The results also indicate that the likelihood of strategic default increases by 23 percent when homeowners learn
that their neighbor with negative equity has received a partial loan for forgiveness. Additionally, strategic default increases by 29 percent if homeowners are able to find an alternate way to finance a new home.
“A key deterrent to strategic default is the fear of losing a good credit score,” said Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, who conducted the study along with Paola Sapienza, a finance professor at Northwestern’s Kellogg School of Management.
“Approximately 74 percent of homeowners in our survey believe it is very important to maintain good credit and this can be a factor in encouraging them not to walk away,” Zingales said.
A separate report from Morgan Stanley showed a similar elevation in the number of defaults made strategically, although the investment bank’s assessment is quite a bit lower than the one put forth by the academia researchers.
Morgan Stanley’s study says that about 12 percent of all mortgage defaults in February involved homeowners who could still afford to make payments but opted to renege on their mortgage contract anyway. The figure is up from the firm’s estimate of 4 percent who strategically defaulted in mid-2007.
According to Morgan Stanley’s analysis, the homeowners most likely to walk away are those with high credit scores and outstanding mortgage balances far above the current market value of their homes.
The magnitude of strategic defaults is reflected in the Obama administration’s new set of housing initiatives, one of which provides for principal write-downs when borrowers owe more than 115 percent of their home’s current value.
The analysts at Morgan Stanley wrote that by focusing on principal reductions for borrowers who are severely underwater, the government’s mortgage programs could curb future strategic defaults.
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