Wikinvest Wire

Able, but not willing to pay the mortgage

Friday, June 26, 2009

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.
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".



Anonymous said...

The wicked borroweth, and payeth not again: Psalm 37:21a KJV

The country has long facilitated this evil practice by inflating away debt, which allows the wicked to borrow and not repay all that they have borrowed. Wickedness has now multiplied to the point where people no longer even want to pay back anything at all. Inflation has helped destroy the morals of the nation, and now the nation is reaping the consequences.

Anonymous said...

Bravo. Strategic defaulters are taking matters into their own hands. The financial sector has been draining communities dry for too long, and richly deserve this passive resistance.

Noz said...

ANON #2:

What a stupid thing to say.

People like this need to be black listed and never be allowed to buy a home again. Ever.

It's people like you who condone lack of personal responsibility.

Not everyone was that dumb or greedy to be burned by banks and financial institutions. If people like that were able to come out of this mess unscathed, then what makes the idiots who think they can buy toys and max out to the hilt with their equity walk away?

Tough sh^t to irresponsible ones...they need to eat it and eat it bigtime.

Anonymous said...

It's simple math - does it make sense to outlay the total cost of a mortgage to have the privilege of owning something that is valued at a fraction of the value of the mortgage itself, or would it be less costly to deal with the credit mess that ensues?

Even when you know you could find a way, some way, maybe two jobs, whatever it takes, to shovel all of that money to a financial institution for the privilege of owning a property - the value of which has been sorely depressed by the actions those selfsame institutions - why is it not alright to walk away from that when they are allowed to walk away from so many things?

This is only a problem if you think that the penalties are too low for mortgage delinquency. The current adminstration seems to think it's a priority to lower these penalties, not raise them. The result is not surprising.

Noz said...

You don't seem to have any concept of personal responsibility.

You completely fail to understand that many people who walk away intended to do so regardless. That's intent to commit fraud.

If you can't afford a BMW, don't go to a BMW dealership and buy a BMW...end of story. If you do and you can't pay for it, regardless of what the BMW dealership has put in front of you as a deal, you are completely if's and's or but's.

No one forced these walkers to buy the properties they did. The same greed that has infested the financial institutions also drove these walkers to do what they did...only think about making a buck and if not, oh well...let's just screw everyone over.

Before you criticize these morally deprived financial institutions, look in the are exactly what you criticize.

scorp99cam said...

I don't understand this as a moral issue. There is a contract and the consequences are known by both parties. The bank is not making loans based on whether they think people will feel morally obligated to repay, the bank is loaning based off ability to repay. The banks that failed to demand 20% down to protect their risk were chasing short term profits but increasing risk of insolvency.

The only problem is that no bank is allowed to fail. Too big to fail should mean too big to exist.

Deepak Shenoy said...

Arguing morality is fine but isn't that what the article says - the issues in strategic default or "ruthless" default are the scale of neg-eq, moral and social considerations. When you're way past the zero equity line, and it's socially acceptable to strategically default, how far can immorality be?

When actions like TARP and PPIP stiff taxpayers and reward banks, it's unlikely morality will come to the taxpayers first. It's a legal contract after all. And let's not talk about trust. Trust is the last thing on anyone's agenda when the contract is cut up, securitized and sold to faceless owners. You never trust a "system" - not unless you are a too-big-to-fail bank. You trust people, you trust an institution but that's about where it stops. When they securitized and set up CDO squares and all that, they set up the stage for ruthless default at some point. (The "social" and "moral" aspects get weakened when you don't care who's on the other side, simply because you don't know them and they never tried to say hello)

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