What Makes Home Owners Walk Away?


Mortgage rates include co-ops 9-11-09

Would Americans default when the value of their mortgage exceeds the value of their house even if they can afford to pay their mortgage (strategic default)?  A Chicago Booth/Kellogg School study recently published and reported by the New York Times found that:

  • 26% of the existing defaults are strategic.
  • No household would default if the equity shortfall is less than 10% of the value of the house.
  • 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house.

Besides relocation costs, the most important variables in predicting strategic default are moral and social considerations.

  • Ceteris paribus, people who consider it immoral to default, are 77% less likely to declare their intention to do so.
  • People who know someone who defaulted are 82% more likely to declare their intention to do so.
  • The willingness to default increases nonlinearly with the proportion of foreclosures in the same ZIP code. That moral attitudes toward default do not change with the percentage of foreclosures in the area suggests that the correlation between willingness to default and percentage of foreclosures is likely to derive from a contagion

Comments are closed.