How Far Underwater Are Homeowners Before Walking Away?

Saw this story on San Francisco Realtor Katy Dinner’s blog today, a WSJ piece I missed which highlights a Fed study about underwater homeowners. According to the Fed, “the median borrower who ‘strategically’ defaults doesn’t walk away from the mortgage until the amount owed exceeds the value of the home by 62%.” Below are some other good excerpts from WSJ, the whole piece is worth reading.

Nearly 80% of all defaults in the sample resulted from the traditional combination of income shocks and negative equity. But for borrowers that had a loan-to-value ratio of 150%, half of all defaults were strategic defaults, driven purely by negative equity.

Most defaults are typically driven by a combination of income shock and negative equity, or what’s known as the “double-trigger” hypothesis. While borrowers who lose their jobs but have equity in their homes can sell and avoid default, those without any equity are left with fewer options.

“Borrowers do not ruthlessly exercise the default option at relatively low levels of negative equity, broadly consistent with the ‘double-trigger’ hypothesis,” the authors write. “But by the time equity falls below -50%, [half] of defaults appear to be strategic.”