More people walking away from mortgages

More people walking away from mortgages
By Suzanne Kapner in New York
Copyright The Financial Times Limited 2010
Published: April 30 2010 04:49 | Last updated: April 30 2010 04:49
http://www.ft.com/cms/s/0/f8f99804-53f5-11df-aba0-00144feab49a.html


A growing number of people are walking away from their homes because they owe more on their mortgages than the properties are worth, new research shows.

The number of so-called strategic defaults spiked to 31 per cent of all US foreclosures in March, up from 22 per cent a year ago, according to research to be released on Friday by the Kellogg School of Management at Northwestern University.

The researchers also found that borrowers are 23 per cent more likely to strategically default on their mortgage once their neighbours walk away from their homes.

“There is a contagion effect, it’s like a disease,” said Paola Sapienza, one of the professors who conducted the study.

The problem of underwater borrowers is the latest wrinkle in the housing crisis that started with subprime loans and quickly spilled over into more of the mainstream population.

Unlike low-income borrowers who have lost their jobs and are unable to make mortgage payments, people who are underwater are choosing to walk way from their homes, even though they have the ability to pay, because the value of the property has declined so precipitously. “It’s an economic decision,” Ms Sapienza said.

The researchers said that banks and mortgage servicers have contributed to the sense that it’s “okay to walk away” by not aggressively pursuing delinquent borrowers.

“Even in recourse states, where banks have the legal means to go after delinquent borrowers, the evidence shows that they are doing very little,” Ms Sapienza said.

As a result, the moral stigma attached to walking away had started to dissipate, said Jon Maddux, the chief executive of You Walk Away, which, for a fee, guides homeowners through the foreclosure process. “People are starting to change their way of thinking. It’s almost become trendy to walk away from your home,” he said.

It does not always make financial sense to walk away, however. Borrowers must factor in the cost of moving and resettling their families elsewhere.

Ms Sapienza estimates that walking away is economically worthwhile only when borrowers owe 25 per cent or more on their mortgages than the house is worth.

Recent studies have suggested that homes underwater may not regain their original value for decades.

Morgan Stanley also released data on Thursday that showed strategic defaults had increased considerably in recent months.

The bank estimates that 10.7m homeowners are underwater, or about 23 per cent of all properties in foreclosure.

“Strategic defaults have emerged as a key theme in the context of the ongoing foreclosure crisis in US housing,” Vishwanath Tirupattur, analyst, wrote. Although he said he hoped new government programmes designed to tackle the problem would start to show results, he added, “there is much work to be done.”

First American CoreLogic estimates that 11.3m, or 24 per cent, of residential properties were underwater at the end of the fourth quarter, up from 10.7m, or 23 per cent, at the end of the third quarter.