More Owners Walk Away When Underwater
A study of the Massachusetts housing market by researchers from Northwestern University and the University of Chicago concludes that a home owner’s propensity to default increases the further their loan goes under water.

The study found that home owners begin to walk away after declines of 15 percent or more. More than 17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent of the value of the house.

The researchers found:

• People under the age of 35 and over the age of 65 are less likely to say it is morally wrong to default compared to middle-aged respondents.
• People with a higher education (8 percentage points) and African-Americans (14 percentage points) are less likely to think it is morally wrong to default, whereas respondents with a higher income are more likely to think it is morally wrong.
• Default is considered less morally wrong in the Northeast (6 percentage points) and West (8 1/2 percentage points).
• There was little difference in the moral view of strategic default among Republicans and Democrats, but independents are less likely to say defaulting is immoral.
• Respondents who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral.

“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” says Paola Sapienza, associate professor of Finance at the Kellogg School of Management at Northwestern University.

Source: Kellogg School of Management at Northwestern University and the University of Chicago Booth School of Business (06/26/2009)

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More Owners Walk Away When Underwater
A study of the Massachusetts housing market by researchers from Northwestern University and the University of Chicago concludes that a home owner’s propensity to default increases the further their loan goes under water.

The study found that home owners begin to walk away after declines of 15 percent or more. More than 17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent of the value of the house.

The researchers found:

• People under the age of 35 and over the age of 65 are less likely to say it is morally wrong to default compared to middle-aged respondents.
• People with a higher education (8 percentage points) and African-Americans (14 percentage points) are less likely to think it is morally wrong to default, whereas respondents with a higher income are more likely to think it is morally wrong.
• Default is considered less morally wrong in the Northeast (6 percentage points) and West (8 1/2 percentage points).
• There was little difference in the moral view of strategic default among Republicans and Democrats, but independents are less likely to say defaulting is immoral.
• Respondents who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral.

“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” says Paola Sapienza, associate professor of Finance at the Kellogg School of Management at Northwestern University.

Source: Kellogg School of Management at Northwestern University and the University of Chicago Booth School of Business (06/26/2009)

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Is Mortgage Forgiveness the Answer?

Some housing experts say the next logical step for helping home owners with negative equity is loan forgiveness.

Home owners with no equity stake and no likelihood of having one anytime soon are increasingly likely to walk away. Some theorize that curbing that trend is the only thing that will stabilize the market.

The nonprofit Milken Institute has devised a plan that would use Fannie Mae to refinance underwater loans with government money. Under the plan, a private lender would provide the money for the value of the home and the U.S. Treasury would issue a second, interest-only loan for the portion of the current mortgage that is underwater. Every year the home owner keeps current with payments, the Treasury would forgive a portion of the loan.

The institute estimates that this would save 1.5 million homes from foreclosure or abandonment and cost taxpayers between $75 billion and $100 billion.

Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, approves that plan, but urges returning some of the appreciation to the original lender as a reward for patience.

“The idea that these loans are worth face value is a fiction,” says Richard Green, director of the USC Lusk Center for Real Estate. “If we don’t deal with [reducing] the balances, we’re not really dealing with the problem.”

Source: Los Angeles Times, Tom Petruno (06/27/2009)

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