At What Point Would YOU Walk Away?
New study about what economists are calling, “Strategic Default”. Where homeowners who CAN afford to stay in their homes despite negative equity are choosing not to……
How widespread is this practice? 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.
* 25% of all defaults are homeowners who CAN afford to pay..choosing not to. They are making the decision that the negative ramifications of foreclosure (or short sale) are less significant to them than the burden of the negative equity.
Four-fifths think strategic default is wrong. Those in the unethical minority are four times more likely to renege on loans (allowing for other influences) when their negative equity reaches $50,000. But morality has its price. When the equity gap reaches $100,000, “immoral” homeowners are only twice as keen to walk away from their debts as “moral” ones. People under 35 or over 65 are less likely to believe that default is wrong. So are the well-educated.
* Interesting….People under 35 or over 65 are less likely to believe that default is wrong. So are the well-educated.
* There IS a price…there is a number where even the most financially conservative homeowner will walk away. Understand, this is what keeps the banks (and the government) up at night. They know that once a homeowner is X% upside down…they will let the house go..(Short Sale or for the misinformed…foreclosure).
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. To break the cycle, policymakers need to address the problem of negative equity, not just unaffordable interest payments.
Here are my questions for you…what is your number? Seriously….at what point would you decide that leaving is better than staying…
Are you considering or have you already done a ’strategic default’?
How much negative equity would your mortgage have to be before you choose to sell it short sale (etc)?
What are you seeing in your market..are homeowners choosing to let their homes go that are 10% upside down….30%…50%? In areas of the country where homes have depreciated 30%+ what will keep those homeowners from not following this same path?
Let us know what you think..share your comments….
(The answer to THESE QUESTIONS are at the essence of what will allow this housing lead depression/ recession to end)
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My number was 50%. My house has dropped 60% thus far and is still going down. Half my neighborhood has turned over to foreclosure. Though many houses are being resold I don’t feel bad about foreclosing to someone across the street who paid half of what I did for their house. I put 0 down… my loan amount is $370,000 and my house is worth $160,000. My Neighbor is also doing the same thing…thus reinforcing the notion that knowing someone makes it a lot easier. We both also haven’t paid our mortgages in about 6 months and neither of us has had an NOD filed. I was willing to stay when the house was down 25-30% and I think people willing to ruin their credit over <10% are foolish but at the point that it becomes most of the money you will earn in your life as negative equity it is worth walking away. If I paid on the loan with the interest (40 year fixed)… I’d pay an extra $700,000 over what someone current buying these homes is paying… I don’t know if anyone has even factored in the interest portion of it.
I read something just today that stated the average loss Wells Fargo is taking on homes sold via Short sale…in California…$250,000. Thats $250,000 LOSS per loan/ sale.
I think this study would be a lot more interesting if they did it in say just CA, NV, FL, and AZ. I’m guessing the number is more like 50% willing to default in those states. Especially CA where loans are non-recourse. I’ve talked in public with many random people about walking away and I have yet to run into anyone really opposed to it in inland empire, CA. When housing in an area drop 65% in 2 years that happens.