Anger over negative equity drives some to default on mortgages

Anger can drive decision to walk away from home, mortgage

WASHINGTON — Memo to the bank: Take this underwater, money-sucking house and shove it! Wreck my credit for years to come, I'm walking away no matter what.

Some homeowners are taking such drastic action — even if it doesn't make financial sense. But why?

That's the question posed in a new paper by Brent T. White, the University of Arizona law professor whose 2009 academic paper on the fast-spreading "strategic default" phenomenon drew sharp criticism and labeled him as the Pied Piper of the walkaway movement.

Now, based on the personal accounts of 356 strategic defaulters and homeowners on the verge of doing the same, White has found that people who intentionally default on loans are not as calculating as widely believed.

In fact, he says, their decisions to pull the plug "may not turn out to be economically rational." They walk anyway in large part because of emotions, he says. They have moved from feelings of anxiety and hopelessness to anger — anger at their lenders, anger at the government, anger at a financial system they consider to be unfair.

White published his latest paper in Arizona Legal Studies, a law school journal. Following his initial study — which argued that far larger numbers of underwater borrowers should stick it to their lenders — White says he was inundated with e-mails and calls from homeowners. Many provided him extensive details of their financial situations and their difficulties dealing with lenders.

According to real estate analytics firm CoreLogic, negative equity continues to be a massive and corrosive problem. During the first quarter of this year, 11.2 million homeowners across the country owed more on their mortgages than the market values of their properties.

In Las Vegas, 75 percent of all mortgaged homes and condos are underwater. In Phoenix, 550,000 homeowners have negative equity — 58 percent of all houses with loans. Florida's rate of negative equity is 48 percent, followed by Michigan (39 percent) and California (34 percent). Nationwide, nearly one out of every four mortgaged houses is in a negative equity position, according to CoreLogic.

White and other academic researchers believe that severe negative equity is the spark that prompts owners to consider walking away, even those who feel it's morally wrong to default.

White says homeowners who default often have high FICO credit scores, sterling payment histories and solid incomes. As one underwater homeowner said, "There isn't a lender out there who wouldn't give us a loan."

But staring at hundreds of thousands of dollars of negative equity, owners turn anxious, then pessimistic. Older owners worry about their ability to stay afloat in their retirement years if they keep paying their mortgage.

Lenders and loan servicers often play crucial — if inadvertent — roles in motivating owners to walk away, says White. Of the 356 homeowners' situations he analyzed, all reported contacting their lenders to work out some solution before they defaulted.

Many say they were rebuffed by servicers who refused to discuss modifications with anyone still current on loan payments. Other owners told White that they tried to qualify for one of the Obama administration's foreclosure prevention programs but either got snagged by rigid income-to-payment rules or nonresponsive servicers, or were told they were simply too deeply underwater to obtain assistance.

In the end, it often comes down to an emotional response to a frustrating situation.

White says there can be no effective answer to the walkaway trend as long as lenders and government fail to intervene early and address underwater borrowers' needs and emotions.

One possible solution is much deeper principal reduction efforts for owners who have severely negative equity and see no way out. Another, says White, is to create a "rent-based loan program" that allows underwater owners the option of refinancing their balances to an interest rate that would bring their monthly payments in line with the rental cost for a comparable house.

Ken Harney can be reached at kenharney@earthlink.net.

Anger over negative equity drives some to default on mortgages 05/21/10 [Last modified: Friday, May 21, 2010 5:30am]

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