Should A Borrower With An Underwater Mortgage Strategically Default?


By Evan Nemeroff at mortgageservicingnews.com

Does a borrower whose mortgage is underwater have an obligation to continue paying their monthly loans if they have the ability to do so? The answer to this question is different whether you speak to an economist or a homeowner.

According to a Zillow home price expectations survey in which 114 responses were compiled by Pulsenomics LLC from a group of economists, real estate experts and investment and market strategists, 71% said they would not strategically default on their mortgage that is at least 40% more than the current value of their home.

In a separate national survey conducted by Ipsos on behalf of Zillow where 2,009 adults where asked if they would pursue a strategic default, 59% of homeowners said they would not utilize this strategy if they were underwater on their home by 40%.

Currently, out of the 31% (15.3 million) of U.S. homeowners who have a mortgage underwater—paying a mortgage that is higher than the value of their home—nearly three-quarters have properties that are 40% below their buying cost, Zillow’s second quarter negative equity report said. Regionally, high rates of negative equity have accumulated in states such as California, Florida, Nevada, Arizona, and Georgia, Zillow reported. On average, homeowners across the country owe $75,235, approximately 44%, more than what their house is worth.

When homeowners were asked in the survey why they would not choose to strategically default, 37% cited moral reasons, while 35% indicated it didn’t make sense since they intend to live in that house for an extended period of time.


“We were initially surprised that so few economists would be willing to strategically default, since when you do the math, it can often be the best economic choice, if you leave aside moral and ethical considerations,” said Stan Humphries, chief economist for Seattle-based Zillow. “Of course, strategic default is not just a mathematical decision. The most common reason for avoiding strategic default cited by homeowners was that it is a moral issue. That likely comes into play with economists and analysts, as well.”

Even though one out of every three homeowners with a mortgage is underwater today, Zillow said 90.8% of these homeowners are current on their mortgage and continue to make payments.

Additionally, the Zillow survey also asked the economists for their opinion on the adoption of government-sponsored mortgage principal forgiveness initiatives for underwater borrowers. The survey found that 72% of respondents opposed any adoption of such programs, while 28% were in favor.

“These survey results suggest that economic and financial considerations are not the dominant drivers of behavior for even deeply underwater borrowers,” said Terry Loebs, the founder of Pulsenomics LLC. “This underscores the challenges in valuing underwater mortgages and in determining the costs and benefits of principal forgiveness initiatives.”

Meanwhile, homeowners in one of the states hardest hit by the housing crisis have a different opinion regarding strategic defaults.

In Nevada, where over 60% of homeowners are underwater, a “Face of Foreclosure” report released by the Nevada Association of Realtors polled 1,000 state residents and revealed that 45% believe “there is nothing wrong” with strategically defaulting on their mortgages. However, the other 45% of the survey respondents believe that homeowners still have a legal and ethical obligation to pay for their mortgage if they can.

“This year’s report shows how polarizing this issue has become,” said Blane Johnson, president of the Nevada Association of Realtors. “The report does show that it’s more socially acceptable to strategically default on your mortgage. I hope banks and government leaders will look at this to help them get ahead of these issues.”

Last year, one out of every 16 Nevada properties had a foreclosure notice, the report said. According to 500 individuals surveyed who personally experienced a foreclosure in the state, just over one quarter (27%) indicated they strategically defaulted this year, 4% more than the 2011 report.

Furthermore, 40% of those going through the default foreclosure process were told by their financial institutions to strategically default on their mortgage.

Johnson said lenders could do more to assist distressed homeowners to refinance or modify their loans as well as streamline short sales. State residents agreed with Johnson, as only 9% of those who were foreclosed upon and 10% of all survey respondents said foreclosure prevention programs have helped. Also, 55% of all Nevadans believe the government has failed to address the foreclosure crisis.

Despite their frustration about the housing problems within the state, about a quarter of those who faced foreclosure said they are likely to buy another home in the next two years.

“If the help is real, people in Nevada are saying they can use it,” Johnson added. “We found that most people want to get back into the market and that 79% of those who faced foreclosure still believe owning a home is part of the American dream.”

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