26% of mortgage defaults may be intentional
Posted
Jul 08 2009, 02:13 PM
by
Karen Datko
Rating:
A new study indicates that 26% of homeowners who quit paying the mortgage can afford to pay but no longer want to because they owe more than the house is worth.
The economists who did the study call this a "strategic" default. Time magazine reports:
"They can still afford to pay but they decide not to," says Paola Sapienza, a finance professor at Northwestern University and one of the paper's authors. "It's very easy to do this in the U.S."
That figure may be too high, or may reflect reality only in states where home values have taken a nosedive -- think Arizona, California, Florida and Nevada. The researchers told Time that "their statistics are not exact and should be taken primarily as an indication that there is a looming problem ...."
Regardless, it raises the ugly question of when it's OK to walk away from your home. We think most people would agree that defaulting is appropriate only if staying on would be financially disastrous and there's no help in sight. "We cross the ethical line only when we choose not to pay ...," MSN Money columnist Liz Pulliam Weston wrote.
Remember, too, that there are consequences, like ruined credit and a damaged reputation, and hopefully more than a smidgeon of guilt.
However, several studies suggest that the number of people who choose not to pay goes up in areas with a large number of homeowners who are substantially underwater. There is perhaps a domino effect or a herd mentality. If your neighbors stop paying, maybe, you think, it's fine if I do too. Heck, everyone's doing it. Time reports:
The researchers found that even though 81% of people surveyed considered it immoral to intentionally default, those respondents who said they knew somebody who had were nearly twice as likely to say they themselves would. People who live in areas with high foreclosure rates were also more likely to say they'd be willing to walk away.
Related reading:
When to walk away from a mortgage
Homeowners who just walk away
Is your home worth keeping?
How to buy from sinking homeowners
