Anger at the root of mortgage default problem, study finds
Memo to the bank: Take this money-sucking, underwater house and shove it! Go ahead and wreck my credit for years to come. I'm walking away, no matter what.
That's the question posed by Brent T. White, a University of Arizona law professor whose academic paper last year on the fast-spreading "strategic default" phenomenon 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 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 economically rational or calculating in their decision-making as widely thought.
In fact, he said, 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 have transitioned from feelings of anxiety and hopelessness to outright anger at their lenders, the government and a financial system they consider unfair.
White published his latest paper in Arizona Legal Studies, the university law school's journal. After a study he did 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 financial situations and difficulties dealing with their lenders.
According to CoreLogic, a real estate analytics firm, negative equity continues to be a massive and corrosive problem. During the first quarter, 11.2 million homeowners across the country owed more on their mortgages than the market value of their properties.
In Las Vegas, 75 percent of mortgaged homes and condos are underwater. In Phoenix, 550,000 homeowners have negative equity -- 58 percent of houses with loans. Florida's rate of negative equity is 48 percent, followed by Michigan at 39 percent and California at 34 percent. Nationwide, nearly one out of four mortgaged houses is in a negative equity position, according to CoreLogic.
White and other academic researchers say that severe negative equity is the essential spark that prompts owners to consider walking away -- even those who think it's morally wrong to default.
Based on the personal accounts shared by strategic defaulters, White said, they often have high credit scores, sterling payment histories and solid incomes. As one underwater homeowner said in an e-mail to White, "There isn't a lender out there who wouldn't give us a loan," based on credit performance.
But staring at hundreds of thousands of dollars of negative equity, owners become 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.
Lenders and loan servicers often play crucial -- if inadvertent -- roles in motivating owners to walk away, White said. Of the 356 homeowners' situations he analyzed, 100 percent reported contacting their lenders to work out a solution before they defaulted.
Many say they were rebuffed by servicers who refused to discuss modifications with anyone current on loan payments. White quoted one deeply underwater homeowner: "So many times I have called my mortgage company to say that I have been a good-paying customer, who despite the difficult economic times, [has] continued to pay on time. I am told over and over again that they cannot do anything for me."
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 non-responsive servicers, or were told they were too deeply underwater to obtain assistance of any sort.
In the end, anger pushes even the most reluctant defaulters over the line.
Some of the anger is directed at the federal government. One couple told White: "Frankly we are tired of getting the short end of the stick, while the government seems to rescue everyone but us."
White says there can be no effective answer to the walk-away trend as long as lenders and the government fail to intervene early and address underwater borrowers' needs and emotions.
One possibility: much deeper principal-reduction efforts for owners who have severe negative equity and see no way out. Another option offered by White: Create a "rent-based loan program" that would allow 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.