Memo to the bank: Take this underwater, money-sucking house and shove it! Go ahead and wreck my credit for years to come. I’m walking away no matter what.
That’s the provocative question posed by Brent White, a University of Arizona law professor whose academic paper on the fast-spreading “strategic default” phenomenon last year drew sharp criticism from lenders and Wall Street, who viewed him as the Pied Piper of the walkaway movement.
Now White has published a new 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 believed.
In fact, he says, 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’ve transitioned from feelings of anxiety and hopelessness to outright anger at their lenders, anger at the government and anger at a financial system they consider unfair.
White published his latest paper in Arizona Legal Studies, the law school journal. Following his initial study 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 own financial situations, and their difficulties dealing with their lenders.
According to real estate analytics firm CoreLogic, negative equity continues to be a massive and corrosive problem. During the first quarter of this year, 11.2 million homeowners across the country owed more on their mortgages than the market values of their properties.
Nationwide, nearly one out of every four mortgaged houses is in a negative equity position, according to CoreLogic.
White and other academic researchers believe that severe negative equity is the essential spark that prompts owners to consider walking away — even those who feel it’s morally wrong to default.
Based on the personal accounts shared by strategic defaulters, White says they often have high FICO credit scores, sterling payment histories and solid incomes. As one underwater homeowner put it in an e-mail to White, “there isn’t a lender out there who wouldn’t give us a loan” considering their previous credit performance.
But staring at hundreds of thousands of dollars of negative equity, owners turn 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 today.
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 some solution before they defaulted.
Many say they were rebuffed by servicers who refused to discuss modifications with anyone still 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, have 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 simply 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 walkaway 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 severely negative equity and see no way out. Still another, said White: Create a “rent-based loan program” that allows 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.
Ken Harney is a real estate columnist with the Washington Post.