Could You Walk Away?

Would you, under any circumstances, default on your home mortgage,sinking-home even if you could afford to make the monthly payments?

According to new research from the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management.

A study found that 26 percent of the record numbers of home mortgage defaults across the country are “strategic” — that is, calculated economic decisions to bail out of loans by owners who actually have the money to make the payments but can’t handle the negative equity they’re carrying caused by local property value declines.

Co-authors Paola Sapienza, Luigi Zingales and Luigi Guiso used interviews with members of 2,000 American households in December and March to explore the moral and social dynamics of strategic defaults. The two 1,000-person samples came from the Chicago Booth/Kellogg School Financial Trust Index, which monitors the level of trust households have in the financial system.

An important factor in walkaways, according to the researchers, is the level of foreclosures owners observe in their community and their personal acquaintance with owners who have defaulted. In the latter case, owners who know someone who defaulted strategically are 82 percent more likely to default themselves, compared with owners who do not know anyone in that situation.

The higher the number of foreclosures in a given ZIP code, the higher owners’ willingness to walk away, the researchers found, suggesting what they call a “contagion effect that reduces the social stigma associated with default as defaults become more common.” High numbers of foreclosures also appear to create a “vicious circle” that increases neighboring owners’ negative equity and greatly raises the probability of additional defaults, foreclosures and equity destruction in the area.

Though the authors offer no specific remedies — they are behavioral researchers, not policy advisers — they argue that the traditional assumption that borrowers default because they can’t afford their monthly payments needs to be re-examined in light of accelerating foreclosures in some markets combined with plummeting equity.

The Obama administration appeared to take a step in that direction on July 1 when it allowed refinancings of Fannie Mae- and Freddie Mac-owned mortgages where owners have up to 25 percent negative equity. Previously the limit was 5 percent.

To find out all the benefits and options for preventing foreclosure, contact Eddie Perez, Broker-REALTOR, CDPE or Anoir Redouane, REALTOR, CDPE.  Their market includes Hoboken, Jersey City, Weehawken and Union City.  They can be reached at eddie@InvestHoboken.com or 201-344-2886.

Advertisements
Explore posts in the same categories: Foreclosure

Tags: , ,

You can comment below, or link to this permanent URL from your own site.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: