Facing the Mortgage Crisis

In the wake of the housing bubble and the lingering economic downturn, 23% of homeowners now owe more on their mortgage than their home is worth.  Many are so far underwater that they have no reasonable hope of creating equity until the housing market fully recovers.  For the hardest hit areas, this could take over ten years.  Thousands of underwater homeowners are able to make their mortgage payments, but they’re grappling with the possibility that it may not be the best use of their money.

More than ever before, people in this position are choosing to strategically default, or “walk away.”  This decision has severe effects on one’s credit rating, but people are more and more willing to take the hit, opting to rent for drastically cheaper rates.  In a letter to NPR’s Planet Money blog, one homeowner described how staying in his home doesn’t make sense: “If house prices climb by 5% a year, it’d be 15 years before we broke even … We can rent for half the price. Over the 15 years to break even, it would cost us $12,000 a year in extra payments for no equity and we’d be trapped in the home.”

The issue of walking away has been discussed from many angles.  Often creeping into the dialogue is the question of morality: isn’t it wrong to abandon a loan and shirk one’s financial obligations?  Homeowners are increasingly demonstrating that they don’t think so.  One factor is the prevalence of foreclosures.  Experts suggest that defaulting on a mortgage was once seen as a sign of irresponsibility.  Now, however, foreclosures are commonplace, and this stigma has diminished.  People are more likely to consider walking away when several of their friends and neighbors have already been foreclosed on, especially when continuing to make mortgage payments is such a raw deal. 

A widely read report by Brent White of Arizona State University argues that individuals observe different norms than financial institutions, and this has a crippling effect on homeowners’ financial decisions.  Businesses operate with the sole purpose of maximizing profits, even if that means increasing rates or downsizing their workforce of loyal employees.  Such moves are viewed with the understanding that they are necessary for the company to remain economically viable.  Individuals, however, see moral implications in their decision to default on a loan, even when it is by far their best financial option.  This asymmetry works against homeowners.

Strategic defaults serve as another illustration of the recession having the potential to forever alter how Americans approach their finances. This issue will surely continue to develop as the weak housing market lingers.  The prevalence of strategic defaults has been widely covered among major news outlets and many perspectives are out there.  For additional information, try this New York Times report or this story from CBS News. 

If you are having trouble paying your mortgage or are considering walking away, please see a housing counselor who can explain all of your options.  To find one near you in the St. Louis region, see our community resource map.  You can locate HUD-approved housing counselors nationwide at HUD’s website.