What would it take for you to walk away from your mortgage?
Kenneth Harney, in his column Nation’s Housing, reports on an interesting study recently done by the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management. This study took a look at homeowner’s attitudes toward mortgage defaults, specifically what’s come to be called “strategic” walkaways or decisions to bail on a mortgage due to purely economic reasons. The study found that “26% of the record number of home mortgage defaults across the country” were strategic – the homeowner had the ability to pay the mortgage but chose not to because the debt was greater than the asset. In other words, one in four of the current foreclosures is not due to hardship, but rather a lack of compunction.
My partner and mortgage rate expert, Brian Brady, has for some time now railed against the disappearance of moral compunction with regard to mortgages. His contention, as I understand it, is that moral compunction was priced into the model by lenders. There has historically been a stigma attached to not paying one’s debts, especially one’s home mortgage debt. This may or may not be true; I am no expert on the history of mortgage defaults in our nation, but it is certainly compelling. If accurate, the obvious question then becomes: to what degree did moral compunction affect rates and if it is indeed gone, how much higher will rates go?
There is no real mystery to how mortgage rates are priced. Mathematicians create models of mortgage “behavior” based on the 4 C’s: Capacity, Capital, Collateral and Credit. Of these four, Credit is really what we’re talking about here. Your income, your assets and the property’s value are theoretically objective but your credit… well, it’s not really credit that’s being measured here is it? It’s your Character; your likelihood to honor your debts, although lenders don’t like to say that because it has a snooty, superiority quality. Make no mistake though, character is most definitely being evaluated during the loan process. So the question seems to be: How do these Read more
