When Default Is a Strategy

The researchers found that age, tenure of homeownership, the frequency of foreclosures in a person's Zip code and even politics influence an owner's willingness to bail out of a mortgage. Owners under the age of 35 are less likely to have moral problems with strategic defaults, as are self-described political "independents," compared with Republicans and Democrats.

An important factor in walkaways, according to the researchers, is the level of foreclosures that owners observe in their community and their personal acquaintance with owners who have defaulted. In the latter case, owners who know someone who defaulted strategically are 82 percent more likely to default themselves, compared with owners who do not know anyone in that situation.

The higher the number of foreclosures in a given Zip code, the higher owners' willingness to walk away, the researchers found, suggesting what they call a "contagion effect that reduces the social stigma associated with default as defaults become more common." High numbers of foreclosures also appear to create a "vicious circle" that increases neighboring owners' negative equity and greatly raises the probability of additional defaults, foreclosures and equity destruction in the area.

Though the authors offer no specific remedies -- they are behavioral researchers, not policy advisers -- they argue that the traditional assumption that borrowers default because they can't afford their monthly payments needs to be re-examined in light of accelerating foreclosures in some markets combined with plummeting equity.

The Obama administration appeared to take a step in that direction on July 1 when it allowed refinancings of Fannie Mae- and Freddie Mac-owned mortgages where owners have up to 25 percent negative equity. Previously the limit was 5 percent.

Kenneth R. Harney's e-mail address is kenharney@earthlink.net.