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Walking away from homes research

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June 27, 2009 – Comments (5)

CR has a post on recent research on walk away.

The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default — even if they could pay the mortgage — when the equity shortfall hits 50% of the house’s value, they found.

I am surprised that only 17% would default if they owe double what their home is worth. Lenders need be counting their blessing the rate is that low.  

I did hours upon hours upon hours of analysis of low rates in Low interest rates - as destructive as ursury and  Six Degrees of Leverage

The burden of paying the `top` is far more expensive then paying the second half of a debt.   I don`t have an amortization calculator on this computer, but the first half takes so much longer to pay off then the second half.

We bought into the market originally when it was high and 5-7 years after being home owners our home was selling for 10-12% less then what we paid.  It worked out how much more expensive it was because of also paying all the extra interest on what we over paid and it the extra interest was about the same as what our home had declined.  This was an enormous set back.  We had about 30% equity when we bought so it was like every cent we paid for mortgage the whole time just paid for the equity loss and interest, and we were making accelerated payments.

I wonder if these people have worked out the numbers.

5 Comments – Post Your Own

#1) On June 27, 2009 at 6:22 PM, checklist34 (99.72) wrote:

i would imagine that at least some of the population has some basic code of ethics, a sense that a deal is a deal, and doesn't want to not fulfill their obligations / accepts responsibility for their mistakes.

or wasn't looking at he home as a short term investment but rather as a place to live, or thinks oh well, it'll come bakc up eventually

just some thoughts.

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#2) On June 29, 2009 at 5:13 AM, BGriffinFlTiming (< 20) wrote:

The paper this article references is an ideal case study of cognative biases.  The paper is repleat with oversights and half-baked analysis.

 Just a few examples:

-Paper bases % of defaults that are strategic on the ratio of the number of people respondents know who walked awayeven though they could pay, to the total number of people repsondents know someone who walked away.....:
--without qualifying 'know someone' (someone on your street, in your town, a freidn of your mother in another state)
-- without qualifying 'afford to pay' (while foregoing childrens tuition, mothers nursing care, or perhaps using 401k)
--without qualifying respondents knowledge of or ability to judge the finances of any people known to have defaulted

- Paper utilizes the respondents stated value of thir home and quesitons the respondents on their intention to walk away at various levels of negative equity: $50K, $100K, and $200K (or $300K).....:
--however, fails to chcek the homeowner's accuracy of their homes value,
-- fails to question the homeowner on how their arrive at the value,
-- (very importantly) fails to ask the frequency with which the homeowner checks the value (if the negative equeity reaches the indicated statistical default threshold, but the homeowner fails to notice, how likely are they to act?)

- Paper fails to gater iformation on the homeowners current level of mortgage debt
-- completly overlooking the possible coincidental actuality of the survey hypothetical, or the complete impossibility thereof (hard to have $300,000 in negative equity whe you only owe $100,000)

- Makes several convenient assumptions of the actions and motivations of strategic defaulters while ignoring others.  For example the paper notes that strategic defaulters have incentive to appear as though they cannot pay to survey takers, but fails to acknowledge the pressure homeowners feel to 'keep up with the Joneses' and tell neighbors (survey resondents) that they are financially better off than they are.

Very poor work.

 

CHECKLIST:  you wrote:  >>>'...i would imagine that at least some of the population has some basic code of ethics, a sense that a deal is a deal,...'<<<</strong>

I would also imagine that a portion of the population understands that part of the deal is the forfeit of assets if repayment conditions are not met.  Is this not part of the deal??? 

I am curious if the basic code of ethics you invision would forgo paying for a mother's nursing care in order to make house payments? Forgo a daughter's college tuition?  Forgo life insurance payments? Perhaps that code of ethics requires a person to cash out their 401K to make the payments....

The point is that the choice is individual, and economic.  It is not moral, and it is not for you nor the government to make.

 

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#3) On June 29, 2009 at 11:01 AM, ByrneShill (78.02) wrote:

Those people who end up being 10%, 15% or even 50% negative equity mostly lack the business acumen to rent while renting is clearly cheaper than buying, so I wouldn't be that surprised that they make the same mistake of not walking away when walking away is clearly the best option.

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#4) On June 29, 2009 at 11:21 AM, farmnut1985 (33.56) wrote:

If you default you also destroy your credit and suffer the consequences when you need a loan in the future as well.  The biggest I think is the premise of code of ethics as stated before by Checklist, I still like to make the assumption that the American public are good hardworking honest people.

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#5) On June 29, 2009 at 4:24 PM, ByrneShill (78.02) wrote:

@farmnut: If I was 50% in the red on a 500k$ house, I'd destroy my credit rating to get out of it. If you're 250k$ in the red, you won't get that coveted loan anyway, and it's gonna take you longer to reimburse the extra 250k$ you owe than it's gonna take you to repair your credit rating.

As for being honest hardworking blah blah blag... the terms of the contract are being followed. If the bank didn't want to enter that contract, all it had to do was to not enter into the contract. Now they've gotta live with their signature, and the signed contract stipulate that walking away clears you of the debt. Mind you, it is much different in many countries, including canada, where me and dwot live. Now the banks can't cry foul. They've got an army of lawyers, accountants and whatnot, all they had to do was to structure the loans in a way not to get boned when things turn south, or not originate the loans in the first place.

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