Strategic Default Not Best Option for Underwater Mortgages

by 26 Jul 2012

71 Percent of Surveyed Economists Would Not Strategically Default, According to June 2012 Zillow Home Price Expectations Survey

SEATTLE, July 26, 2012 /Zillow/ -- If faced with a deeply underwater mortgage, most economists and homeowners agree they would not strategically default, according to dual surveys from Zillow®.

Nearly three-quarters of economists surveyed in the June 2012 Zillow Home Price Expectations Survey (71 percent) said they would not strategically default, even if they owed on their mortgage at least 40 percent more than the current value of their home.

The survey, sponsored by leading real estate information marketplace Zillow, Inc. (NASDAQ: Z) and conducted by Pulsenomics LLC, was compiled from 114 responses from a diverse group of economists, real estate experts and investment and market strategists. The main portion of the survey, which captures respondents' expectations concerning the future of home prices, was released last month.

In a separate Zillow survey conducted by Ipsos®, 59 percent of homeowners said they would not make the decision to strategically default if they were underwater on their home by more than 40 percent[i]. Nearly 75 percent of homeowners in the U.S. with an underwater mortgage are underwater by 40 percent or more, according to Zillow's first quarter Negative Equity Report[ii].

"We were initially surprised that so few economists would be willing to strategically default, since when you do the math, it can often be the best economic choice, if you leave aside moral and ethical considerations," said Zillow Chief Economist Stan Humphries. "Of course, strategic default is not just a mathematical decision. The most common reason for avoiding strategic default cited by homeowners was that it is a moral issue. That likely comes into play with economists and analysts, as well."

Thirty-seven percent of homeowners who said they would not strategically default cited moral reasons, while 35 percent indicated it didn't make sense given that they intended to live in their current home for a long time.

The Zillow Home Price Expectation Survey additionally asked the same group of economists and housing analysts their stance on the adoption of government-sponsored mortgage principal forgiveness initiatives for underwater borrowers. The survey found that 72 percent of respondents opposed any adoption of such programs, while 28 percent were in favor.

"These survey results suggest that economic and financial considerations are not the dominant drivers of behavior for even deeply underwater borrowers," said Pulsenomics Founder Terry Loebs.  "This underscores the challenges in valuing underwater mortgages and in determining the costs and benefits of principal forgiveness initiatives."

The June 2012 survey is the 14th edition of the Home Price Expectations Survey, and it was conducted from May 31-June 14, 2012, by Pulsenomics LLC on behalf of Zillow, Inc.

COMMENTS

  • by William Matz | 7/27/2012 12:52:14 PM

    As for most surveys, the results depend upon the wording of the question. Here, if the question is, "Would you default JUST because your home is 40% underwater?", probably most will say no. But that decision will be influenced by a host of other factors, e.g. no lender recourse, ties to house, stability of job, need to pressure lender for modification, availability of other housing, etc. I suspect most would consider it if the combination of factors so indicated.

  • by Mark Moore | 7/30/2012 4:05:52 PM

    I agree with Mr. Matz. If you asked the average family with severe negative equity: "Would you strategically default if it meant the difference between your children going to college or not?" Most families are encouraged not to think of the negative equity as "real." They are told it is only underwater on paper. But the $100K they spend over the next 5 to 10 yeas paying down the very real negative equity *could* have been put into a college savings fund.

  • by Dick Salisbury | 7/31/2012 10:30:24 AM

    For those underwater homeowners with a non-conforming jumbo mortgage who are at least 10% upside down, there may be a solution worth considering where:

    - you remain in your home
    - positive equity is restored
    - monthly payments reduce
    - credit is unimpaired

    I represent a private funding group who work with homeowners who have jumbo mortgages and good credit to achieve the outcomes described. No fees are charged - success fee only. Legal, moral, ethical. No success can be guaranteed, but our group is settling quite a few just recently...

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