A new report from the Federal Reserve looks at strategic defaults by underwater homeowners and offers this finding: “We estimate that the median borrower does not walk away until he owes 62 percent more than their(sic) house’s value.”
Strategic defaults involve a borrower who could still afford to pay the mortgage but chooses not to.
The new study suggests that more borrowers than previously thought may be reluctant to default because 1) they believe it is immoral to refuse to pay if they have the money; 2) they fear the effect on their credit scores or 3) they fear other penalties tied to a default.
Nonetheless, the report estimates that in the past four years about one in five defaults were strategic and not prompted by a job loss or other “income shock.”
A striking aspect of the report is simply what happened with homes purchased by borrowers with essentially no money down. The researchers focused on such borrowers who purchased homes in 2006 in California, Arizona, Florida and Nevada. Within three years, 80 percent of those borrowers had defaulted.
That finding backs an argument made by a number of Sonoma County real estate agents and brokers. The argument goes like this: If you have to put a significant amount of your own money at risk when you buy a home, you’ll be more likely to make sure you don’t pay too much and more determined, if possible, to keep paying your mortgage so you won’t lose your investment.
— Robert Digitale