by Hans Eisenbeis
WHAT’S HAPPENING
- A June 2009 academic study from the University of Chicago looks very closely at the factors which influence some Americans with negative equity to walk away from their homes, even if they could afford to continue making mortgage payments.
- The mathematical tipping point: The researchers found that homeowners whose negative equity surpassed 10% of the home’s value became much more likely to engage in a “strategic default” on their mortgage payments. When negative equity reaches 15% of home value, they “walk away massively” (CalculatedRiskBlog.com 6.27.09).
- The research included psychological influences. It found that foreclosure activity was heightened in areas where the social stigma attached to defaulting had been weakened. In other words, foreclosures snowball in many areas because homeowners see others already defaulting.
WHAT THIS MEANS TO BUSINESS
- Strategic defaults are an especially interesting area of research. They suggest a shift in consumer attitudes about debt obligations and responsibility in an environment where banks and credit issuers are taking a lot of blame.
- Nothing attracts a crowd like a crowd. Consumers grow comfortable with the idea of walking away from a negative amortization when they know others who have done it.
- The social stigma attached to financial irresponsibility is still strong, but it’s being shaken by hard economic realities.
RESOURCES
- Read “Moral and Social Contraints to Strategic Default on Mortgages” by Luigi Guiso, Paol Sapienza, and Luigi Zingales
