Nearly one out of ten homeowners, 9.2 percent or 7.4 million homeowners, say they would likely walk away from their homes, default on their mortgages and suffer the consequences to their credit if they felt financially vulnerable and owed more on their homes than they are worth, according to a new national survey released today by Reecon Advisors.
The survey provides the most dramatic evidence to date of the phenomenon called strategic defaults, where homeowners choose to default and suffer foreclosure rather than continuing to make monthly payments on a mortgage that is greater than the value of their homes.
The proportion of U.S. homeowners who owe more on their mortgages than their properties are worth has swelled to about 23 percent, according to the Wall Street Journal. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.
Most homeowners would choose options other than strategic default, the survey found. The vast majority of homeowners would talk to their lenders about modifying their loans (61.7 percent) rather than default. Smaller numbers said they would try to sell now at the best price possible (44.3 percent) or rent out a room to help pay the mortgage (25. percent).
However, nearly one out of five homeowners (19.2 percent) said that it is not very or not at all likely that they would continue to pay the mortgage and hope their home appreciates in value over time.
The importance of strategic defaults to efforts to reduce foreclosures first came to light in a study conducted by researchers from the graduate schools of business at the University of Chicago’s Booth School of Business and Northwestern University. They
found that one out of four homeowners who default on their mortgages make a strategic decision to clear out their belongings and walk away from their homes-even if they can afford to pay their mortgages.
That study found that people rarely default if the negative equity in their home is 10 percent or less. But once that reaches 15 percent, the tendency to walk away from one’s home increases significantly. Nearly one in five individuals would strategically default if their house were worth 50 percent less than their mortgage balance.
In his academic paper “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis, ” Brent T. White, a University of Arizona law school professor, recently urged homeowners to stop paying their mortgages if they owe more than the house is worth. Moreover, he said they should not feel guilty about it or think that they are doing something morally wrong.
The survey is based on interviews conducted from December 4-6, 2009 The survey was conducted by OmniTel, a weekly national telephone omnibus service of GfK Custom Research North America for Real Estate Economy Watch/ UPI.
A total of approximately 1,000 interviews were completed with approximately an equal number of male and female adults. The margin of error on weighted data is +/- 3. Each OMNITEL study is based on a random digit dialing (RDD) probability sample of all telephone households in the continental United States. The RDD sampling system is totally computer based and provides an equal probability of selection for each and every telephone household. Thus, the sample represents telephone households with both listed and unlisted phones in their proper proportions. This procedure employs five variables: age, sex, education, race and geographic region. Each interview is assigned a single weight derived from the relationship between the actual proportion of the population with its specific combination of age, sex, education, race and geographic characteristics and the proportion in our sample that week. Tabular results show both weighted and unweighted bases for these demographic variables.