Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What Motivates U.S. Home Owners in High Mortgage Negative Equity Properties to Stay Put?

Housing-Market / US Housing Dec 18, 2009 - 12:46 AM GMT

By: Tim_Iacono

Housing-Market

Best Financial Markets Analysis ArticleThe question of what motivates underwater homeowners to either stay put and continue to make their mortgage payments (if they can) or "walk away" from their home (and their financial obligations) has been receiving an increasing amount of attention in recent weeks.


In looking at this matter, a good place to begin is with the abstract below from the recent study Underwater and Not Walking Away(.pdf) by Brent White at the University of Arizona:

Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 

1) the desire to avoid the shame and guilt of foreclosure; and

2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.

Brent probably has more than enough sample data in Arizona from which to draw and his conclusions are no doubt valid in many other parts of the country as well where the magnitude of the current "underwater homeowner" problem is highly correlated to the size of the mid-decade housing bubble.

But, what is most fascinating about this report is the aspect of "emotional constraints" that are "actively cultivated by the government and other social control agents". Apparently, this has played a major role in getting underwater homeowners to act (or, in this case, notact) in ways that work against their own financial interests.

In the report, White noted comments by the former Treasury Secretary on one of the hottest housing market topics of the day - strategic defaults:

The worst criticism has been reserved, however, for those who would walk away from mortgages that they can afford. Typical of such criticism is that of Secretary of the Treasury Henry Paulson, who declared in a televised speech: “And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.”

It seems there is a national movement afoot to divert homeowners' attention away from the degree to which they are underwater on their mortgage and focus on monthly payments, that being the thrust of the recent Making Home Affordable government program to slash interest rates while leaving the outstanding debt intact.

To this point, we have lived in a country where the "What's my monthly payment?" culture has thrived, but that seems to be changing and the question that more and more underwater homeowners are now asking is, "If banks can walk away from their obligations, why can't I?"

This is occurring with increasing frequency, Bloomberg reporting just this morning that Morgan Stanley will "relinquish" five San Francisco office buildings after having purchased them more than two years ago near the top of the market. It's probably no coincidence that the phrase "walking away" is noticeably absent from their account when, in fact, that is exactly what the investment bank is doing.

Maybe the rules are different for big banks than for homeowners.

You'd surely think that this is the case after reading part of this story in today's Wall Street Journal, one in a series of excellent reports in the Journal in recent weeks about "strategic defaults" where the morality issue is neatly captured:

A standard mortgage-loan document reads, "I promise to pay" the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient.

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.

What banks have done in recent years has not been a disaster?

And Wall Street firms can walk away from their "obligations" but ordinary Americans can't?

That sort of thinking should be about as popular as Wall Street bonuses right about now.

While simple laziness is surely a big reason why most homeowners will continue to pay $3,500 a month (if they can) for a house that is worth $200,000 less than what they owe instead of sending the keys back to the bank and renting a house down the street for about half the monthly payment, there is clearly a very big moral issue here, one that continues to surprise me every time I run across it.

No stranger to the idea of acting in one's own self interest when it comes to real estate (as detailed here, my wife and I did a short sale back in 1995 when the previous California housing bubble went bust), it doescontinue to amaze me that, in light of some of the most wretched financial market excesses in history, many homeowners continue to think that we live in a world full of Jimmy Stewart-like bankers instead of those populated with the likes of Hank Paulson and Lloyd Blankfein.

It seems that one homeowner's morality is another homeowner's naïveté, that is, unless the latter truly believe that "the meek shall inherit the earth".

We are, by far, the most religious of all western nations, but the idea of somehow being rewarded in the afterlife for continuing to make mortgage payments to Bank of America is beyond my ability to comprehend.

In a place like California, the terms of the deal are quite clear - the bank either gets the monthly mortgage payments until the loan is paid in full or it gets the house back with very few strings attached. And while the word "promise" appearing in the loan documents may prove too much for some borrowers to surmount, it is clearly not a legal impediment.

Without question, many underwater homeowners are acting against their own self interest by continuing to pay their mortgage if other dramatically less expensive housing arrangements can be made.

One could wait for home values to recoup a $200,000 decline, betting on an even biggerhousing bubble materializing someday, all the while making good on the monthly mortgage obligations, but that may take much longer than you think and, in the end, it is sure to bemuch more costly than you could imagine.

Now, there's a big distinction to be drawn here between, say, the just-married couple who bought a house at the top of the market because that's what people do (that's what we did 20 years ago) and your run-of-the-mill wild-eyed housing speculator circa 2005 who managed to amass a large real estate portfolio without ever having earned a high school diploma.

It's not clear if there is any sympathy anywhere for the latter, but too few seem to see any distinction between the two to the detriment of the non-speculator who seems to go on believing that, today, "if you can continue to pay, you shouldn't walk away".

So, where does this all bring us?

A shocking decline in naïveté or, if you prefer, more immoral behavior on the part of the American public regarding their underwater mortgages may be one of the more important developments for the housing market over the next year or two.

By Tim Iacono
Email : mailto:tim@iaconoresearch.com
http://www.iaconoresearch.com
http://themessthatgreenspanmade.blogspot.com/

Tim Iacano is an engineer by profession, with a keen understanding of human nature, his study of economics and financial markets began in earnest in the late 1990s - this is where it has led. he is self taught and self sufficient - analyst, writer, webmaster, marketer, bill-collector, and bill-payer. This is intended to be a long-term operation where the only items that will ever be offered for sale to the public are subscriptions to his service and books that he plans to write in the years ahead.

Copyright © 2009 Iacono Research, LLC - All Rights Reserved

Tim Iacono Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Doris Evans
27 Dec 09, 17:21
Mortgages and Banks won't help to greedy

What else can a person do if the mortgage company won't work with you, my husband lost his job 11 months ago, we still paid our mortgage the best we could, my husband did get a job, but it doesn't pay as much as his last job, we tried to work with the mortgage company but they still wanted the same amount which is over two thousand dollars a month we could pay this when my husband had his other job before he lost it, it is also the mortgage companies and banks moral obligation to work with their customers it is not the customers fault because they lost their jobs, we paid on time every month before this happened to us, even though our house is underwater not worth what we are paying, as far as the modification program goes it is a joke

this is why most people are walking away because they can't get help from the mortgage company or the bank they deal with can't get blood from a turnip.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in