When Homeowners Walk Away: New Research Reveals More Than 25 Percent of Mortgage...

When Homeowners Walk Away: New Research Reveals More Than 25 Percent of
Mortgage Loan Defaults Are Strategic

Financial Trust Index Researchers Study Economic and Moral Factors In
Strategic Default

CHICAGO, June 26 /PRNewswire/ -- While the Obama administration's housing
policy has been largely influenced by a study of the Boston housing market
during the 1990-91 recession in which homes devalued by approximately 10
percent, new research suggests that a novel phenomenon is at hand in the
fallout of today's more severe housing crisis - strategic default on mortgage
loans. Given that homes in numerous parts of the country have lost more than
30 to 40 percent of their value, many homeowners say they would simply walk
away from their loans - without fear of repercussion.

A new paper, entitled "Moral and Social Restraints to Strategic Default on
Mortgages," looks at American homeowners' propensity to default when the value
of a mortgage exceeds the value of their house, even if they can afford to pay
their mortgage. By using new survey data, the paper estimates that more than a
quarter of defaults on mortgage loans are strategic, especially when home
values have fallen by more than 15 percent.

The new research was led by Paola Sapienza (Kellogg School of Management at
Northwestern University) and Luigi Zingales (University of Chicago Booth
School of Business) - co-authors of the quarterly Chicago Booth/Kellogg School
Financial Trust Index - as well as Luigi Guiso (European University
Institute). With data collected from surveys conducted within the last six
months as part of the Financial Trust Index, this paper is the first to
examine the economic and moral implications of strategic default in the
current recession.

Negative Equity
The study of the Massachusetts housing market during the 1990-91 recession
found that very few people who could afford their mortgage chose to walk away
from their homes. Consistent with the earlier paper, this new research shows
that homeowners refrain from defaulting as long as negative equity does not
exceed 10 percent of the value of the home.

After that level, however, the researchers found that homeowners start to
default at an increasing pace, and walk away massively after decreases of 15
percent and more. In fact, 17 percent of households would default, even if
they can afford to pay their mortgage, when the equity shortfall reaches 50
percent of the value of the house.

"Housing policy under the current administration has focused on reducing
households' cash flow problems in response to the housing crisis, but no one
has addressed the negative equity issue as part of public policy regarding
housing," said Sapienza "We're in a completely different economic environment
today, where for the first time since the Great Depression millions of
Americans have mortgage loans that exceed the value of their home."

Moral and Social Factors in Strategic Default
According to the researchers, moral and social variables play a significant
role in predicting strategic default. People surveyed who said it was immoral
to default were 77 percent less likely to declare their intention to do so,
while people who know someone who defaulted were 82 percent more likely to say
they would default themselves.

"The most important barriers to strategic default seem to be both moral and
social," said Zingales. "Our research showed there is a 'multiplication
effect,' where the social pressure not to default is weakened when homeowners
live in areas of high frequency of foreclosures or know others who defaulted
strategically. In fact, the predisposition to default increases with the
number of foreclosures in the same ZIP code."

"Factors such as age, location, political affiliation and attitudes toward
government intervention also impacted respondents' responses to the morality
of strategic default," he added.

Specifically, the researchers highlighted the following data:

-- People under the age of 35 and over the age of 65 were less likely to
say it was morally wrong to default compared to middle-aged
respondents.
-- People with a higher education (eight percentage points) and
African-Americans (14 percentage points) are less likely to think it
is
morally wrong to default, whereas respondents with a higher income are
more likely to think it is morally wrong.
-- Default is considered less morally wrong in the U.S. Northeast (six
percentage points) and West (8 1/2 percentage points).
-- There was little difference in the moral view of strategic default
among
Republicans and Democrats, but Independents were less likely to say
defaulting is immoral.
-- Respondents who supported government intervention to help homeowners
were 12 percentage points less likely to say strategic default is
immoral.

"As defaults become more common, the social stigma attached with defaulting
will likely be reduced, especially if there continues to be few repercussions
for people who walk away from their loans," concluded Sapienza. "This has an
adverse effect on homeowners who do pay their mortgages, and the after-effects
of more defaults and more price collapse could be economic catastrophe."

ABOUT THE SURVEY: On a quarterly basis, the Financial Trust Index captures the
amount of trust Americans have in the private institutions in which they can
invest their money. The survey is conducted by Social Science Research
Solutions (SSRS) using ICR's weekly telephone omnibus service. To assess the
frequency and determinants of strategic default, the researchers included
variables in surveys conducted with more than 1,000 individuals over two
two-week periods in December 2008 and March 2009.

MORE INFORMATION: To learn more about the key findings in "Moral and Social
Restraints to Strategic Default on Mortgages," or to learn about the Chicago
Booth/Kellogg School Financial Trust Index, visit www.financialtrustindex.org.
To arrange an interview, contact Meg Washburn or Allan Friedman at the contact
information listed above.

To learn more about the Kellogg School of Management at Northwestern
University, visit www.kellogg.northwestern.edu.

To learn more about the University of Chicago Booth School of Business, visit
www.chicagobooth.edu.

MEDIA CONTACTS:
Meg Washburn
Kellogg School of Management
Office: 847-491-5446
Mobile: 773-848-4461
m-washburn@kellogg.northwestern.edu

Allan Friedman
The University of Chicago Booth School of Business
Office: 773-702-9232
allan.friedman@chicagobooth.edu

SOURCE Kellogg School of Management

Meg Washburn, Kellogg School of Management, Office, +1-847-491-5446, Mobile,
+1-773-848-4461, m-washburn@kellogg.northwestern.edu; or Allan Friedman of The
University of Chicago Booth School of Business, Office, +1-773-702-9232,
allan.friedman@chicagobooth.edu