When Do Borrowers Tend to Strategically Default on Their Home Mortgages?

In an interesting WSJ blog post yesterday, blogger Nick Timiraos asked the question, "At what point do borrowers who owe more than their homes are worth decide to stop paying the mortgage?". Timiraos links his article to a new study from economists at the Federal Reserve that attempts to answer that question. The results of the study indicates that the median borrower who elects to strategically default on his or her mortgage doesn't walk away from it until the amount owed exceeds the home's value by 62%.

I found the results of this study somewhat surprising -- not the fact that people are choosing to walk away when they owe more than the house is worth, but rather that the threshold is higher than I expected it to be.

Click here for the WSJ blog article.
Click here to access the Federal Reserve study.


Americaneer said...

62% is high. Would 62% of the home value apply to any home value?

Dan said...

Given the economy we're in, I'd have thought it would be more like 30%-35%. But, presumably, the low interest rates over the last few years plays a bigger part than I thought.

Of course, if you can afford the mortgage and you like your home and neighborhood, why would you default anyway?

Do people think that the low current mortgage interest rates are going to stay forever low? I mean, because they've been low for so long, do they think they'll stay low for another 2 years, then they'll buy something else with a good rate?