The New York Times writes tonight about strategic defaults on mortgages, and argues that enough mortgages are deeply enough under water to induce solvent borrowers to think about walking away:
New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying….
by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.
They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.
Although the Times doesn’t say where this “research” comes from, it is presumably survey research of some sort. The problem is that any survey or focus group research around money decisions is notoriously unreliable. And the story illustrates that data is limited:
Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation….
In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.
An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.”
Yves here. Clearly, elective defaults are rising, even if no one can say with confidence by how much. Moreover, one of the elements keeping it at bay is a sense of morality. Both the egregious misbehavior of banksters, and fact that it is starting to be seen as rational, as opposed to shameful, are lowering those inhibitions. Yet the Treasury remains in denial:
The United States Treasury falls into the skeptical camp.
“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.
Yves here. The longer the real estate bust continues, the more deeply underwater borrowers will think hard about the costs of upholding their side of a deal…with a merciless servicer and anonymous investors.
And the Treasury may not be as naive as it sounds. After all, it has a vested interest in preserving the idea that only a (presumably amoral) small minority abandons their mortgages by choice. But this sort of cold-blooded detachment is the logical result of encouraging borrowers to treat their house as an investment, a financial asset, rather than a home.