In an article in Friday’s WSJ it was reported that foreclosures don’t always relate to the owner’s ability to pay the mortgage. It’s becoming increasingly common for borrower’s to walk away simply because their home is no longer a good investment. In a process defined as “strategic default,” the article pointed out that many homeowners are refusing to pay once their negative equity passes 10% of the homes value.
Citing research from the University of Chicago and Northwestern University, the article described how homeowners “walk away massively” once negative equity passes 15% of value. The study points out the correlation between reduced equity in a home and the owner’s sense of moral obligation to make the mortgage payments.
From the study one could conclude that the government’s efforts to aid the foreclosure problem should be focused more towards solving the declining equity problem than merely helping homeowners adjust their payments. And with home values expected to continue their declines in many areas across the country, perhaps it’s time mortgage rescue programs be modified.
The article concluded with some interesting findings regarding the disparity between groups separated by age or income who considered default morally wrong when based solely upon a home’s value.
Read the complete article here: The Wall Street Journal
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