As Many as 1 in 4 Said to Willingly Default on Mortgage

he study found that declining property values are strongly related to increased mortgage defaults, regardless of changes in unemployment. The study also found that the willingness to accept a "strategic default" increases with the percentage of foreclosures in a homeowner's neighborhood.

With property values in many parts of the country declining as much as 30-40 percent, the study reported than many homeowners said they would simply walk away from their mortgages, without fears of repercussions.
Defaults increase as home values drop

Titled "Moral and Social Constraints to Strategic Default on Mortgages," the study is based on two surveys of 1,000 homeowners apiece conducted in December 2008 and March 2009. It found that declining home prices has almost no effect on defaults as long as the drop is less than 10 percent, but increases rapidly once the decline exceeds 15 percent or more.

Significantly, the study found the increase in defaults occurs regardless of changes in local unemployment rates, evidence that defaults are being caused by more than just an inability to make mortgage payments.

"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 report co-author Paola Sapienza, an economist at the Kellogg School of Management at Northwestern University. "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."

The survey asked participants if they knew anyone who had defaulted on a home loan while still able to make payments. By that measure, the authors concluded that 26 percent of defaults in the current economic downturn are strategic, or voluntary. In contrast, only 17 percent of respondents said they personally would walk away from their mortgage if their home value declined by 50 percent.
Reduced social stigma a factor

The likelihood that someone would be willing to consider a strategic default increased significantly once the number of foreclosures in a ZIP code exceeded 16 percent, which the authors said suggested that a reduced social stigma surrounding foreclosure is a factor in the willingness to accept a voluntary default.

"The most important barriers to strategic default seem to be both moral and social," said co-author Luigi Zingales, an economist at the University of Chicago Booth School of Business. "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."

The study found that the old and the young were most likely to embrace strategic default, with those younger than 35 and other than 65 most willing to accept it. No difference was found between Republicans and Democrats, although political independents were found more likely than either to find voluntary default to be acceptable.

The surveys were performed as part of the quarterly Chicago Booth/Kellogg School Financial Trust Index, which Sapienza and Zingales co-author. Luigi Guiso, of the European University Institute, also helped lead the study.