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What kind of homeowners choose to default?

People who walk away from their mortgages are not as calculating as you'd think, says Brent T. White.

May 23, 2010|By Kenneth R. Harney

Reporting from Washington —

Memo to the bank: Take this underwater, money-gulping house and go ahead and wreck my credit for years to come. I'm walking away no matter what.

Why?

That's the provocative question posed by Brent T. White, a University of Arizona law professor whose academic paper on the fast-spreading "strategic default" phenomenon last year drew sharp criticism from lenders and Wall Street, who viewed him as the Pied Piper of the walk-away movement.

Now White has published a new paper, based on the personal accounts of 356 strategic defaulters and homeowners on the verge of doing the same. His finding: People who intentionally default on their loans are not as calculating in their decision-making as widely believed.

In fact, he says, their decisions to pull the plug "may not turn out to be economically rational." But they walk anyway, in large part because they are at the end of their emotional rope. They've transitioned from feelings of anxiety and hopelessness to outright anger at their lenders, the government and/or a financial system they consider to be unfair.

White published his latest paper in Arizona Legal Studies, the law school journal. Following his initial study last year, 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 saddled with negative equity. Many provided him with extensive details of their own financial situations and their difficulties in dealing with their lenders.

Negative equity continues to be a massive and corrosive problem, according to real estate analytics firm CoreLogic. During the first quarter of this year, 11.2 million homeowners nationwide owed more on their mortgages than their properties were worth.

In Las Vegas, 75% of all mortgaged homes and condos are underwater. In Phoenix, 550,000 homeowners have negative equity — 58% of all houses with loans. Florida's rate of negative equity is 48%, followed by Michigan at 39% and California at 34%. 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 essential spark that prompts owners to consider walking away — even those who feel it's morally wrong to default.

Based on the personal accounts shared by strategic defaulters, White says they often have high FICO credit scores, sterling payment histories and solid incomes. As one underwater homeowner put it in an e-mail to White: Considering their previous credit performance, "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, about their financial futures. Older owners with severe negative equity worry about their ability to stay afloat in their retirement years if they keep paying their mortgage today.

Lenders and loan servicers often play crucial — if inadvertent — roles in motivating owners to walk away, White says. Of the 356 homeowners' situations he analyzed, 100% 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 of any sort.

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

One possibility: much deeper principal-reduction efforts for owners who have severely negative equity and see no way out.

Still another, says White: 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.

kenharney@earthlink.net

Distributed by Washington Post Writers Group

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