The Mortgage - Walking Away When You Can Pay


Some of the promises our government has made in the last few months about “helping people keep their homes” may actually worsen the housing crisis.

New proposals ignore the real danger associated with “strategic default,” when homeowners decide to stop paying their mortgage, even though they have enough money to make payments. The Obama administration is working to lower monthly mortgage payments, but as a recent study conducted at the University of Chicago points out, it is not necessarily high payments but negative equity in homes that drives default.

In the study, researchers found that “individuals who think the government should help homeowners who cannot make their mortgage payments are 12 percentage points less likely than the average homeowner to say strategic default is morally wrong.” The same study states that “26 percent of existing defaults are strategic.”

It is difficult to prove whether someone stopped making mortgage payments out of need or out of choice. The study discovered the true rate of strategic default by asking people at what point they would choose to walk away from their home instead of continuing to pay their mortgage. Was it when the value of their mortgage exceeded the value of their house by $50,000, $100,000, or $300,000? The survey found, “no household would default if the equity shortfall is less than 10 percent of the value of the home. Yet, 17 percent of households would default, even if they can afford the mortgage, when the equity shortfall reaches 50 percent” (emphasis added).

The problem of strategic default highlights one of the ways in which the current downturn is a function of ethical failure. Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage? Such difficulties are not easily addressed by legislation because they are deeply rooted in the moral culture in which the market operates. The University of Chicago survey found that important variables in predicting strategic default have nothing to do with money. “People who consider it immoral to default are 77 percent less likely to declare their intentions to do so, while people who know someone who defaulted are 82 percent more likely to declare their intentions to do so.” The more socially acceptable it becomes to default, the more likely people are to do it.

The bottom line: Choosing to walk away from a mortgage when you have the money to make payments is fraud. A contract has been signed, terms have been laid out, and a promise has been made. The biggest problem this survey shows us is not that 26 percent of defaults are strategic, but that Americans are not exactly sure if strategic default is wrong.

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