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Homeowners Walking Away

A RECENT study suggests that most homeowners have qualms about abandoning a mortgage that they can afford to pay, even if it straps them to an investment that’s unlikely to pay off anytime soon.

But if the house has lost significant value, or if many neighbors walk away from their mortgages, the study says, “strategic defaults” are significantly more likely.

It is an increasingly common question facing homeowners, many of whom have seen their properties lose large amounts of equity in recent years: would you give up a home that is considered to be “underwater” even if you could still afford the monthly payments?

Three academic researchers posed that question this year in a telephone survey of about 1,000 homeowners nationwide and found that when a mortgage exceeds the home’s value by less than 10 percent, strategic defaults are rarely considered. But if the home’s value dropped to half of the mortgage amount, 17 percent would abandon the loan.

“The fact that there is a price for morality is kind of obvious, in a sense,” said Luigi Guiso, a researcher with the European University Institute in Fiesole, Italy, who, along with American researchers at Northwestern University and the University of Chicago, completed the survey in March. “What we did not know was how big of a price it would be.”

Eighty percent of the respondents considered strategic defaults morally wrong. People under age 35, though, judged strategic defaults less harshly — 69 percent found them morally wrong — than those of middle age, of whom 86 percent found them morally wrong.

The survey suggests that the moral barriers to strategic default erode significantly once the mortgage exceeds a home’s value by at least 20 percent.

There are roughly 461,000 homeowners in New York City and its surrounding counties who are considered underwater with their mortgages, and more than 23,000 of them have mortgages whose value exceeds the value of their homes by at least 25 percent, according to First American CoreLogic, a mortgage industry consultant in Santa Ana, Calif.

Mr. Guiso says social factors can affect a person’s decision to stay in his or her home or walk away. According to his survey, people who bought their homes more than five years ago were nearly 80 percent less likely to consider a strategic default than recent purchasers. Friendships with neighbors and ties to the local school system are strong anchors, he explained.

Homeowners may not always understand the implications of a strategic default, said Jeanne Kelly, the president of the Kelly Group, a credit consulting business in Rhinebeck, N.Y. A foreclosure will drop the borrower’s credit score by at least 100 points, and will remain on a credit report for seven years, she said.

Craig Watts, a spokesman for FICO, the company that developed the most widely used scores for assessing credit risk, agreed. He added that if a borrower had a credit score of 700 before a foreclosure, it could take seven years to regain that level.

“The main factors for improving one’s FICO score,” he said, “are the same regardless of one’s current score: pay all bills on time, keep any revolving account balances low, and take on a new credit obligation only when you really need it.”

Ms. Kelly, the credit consultant, said a bank might not offer the borrower another mortgage even if his or her credit score rebounded quickly.

And in the meantime, consumers who walked away from a mortgage will struggle to get credit of any kind. “You won’t get a personal loan or a car loan,” Ms. Kelly said, “and your credit card limits will drop and your interest rates will rise.”

Job seekers can also run into trouble, because many employers check credit reports. “For those who want to throw away the keys and say the bank’s made enough money already,” she said, “it’s not that simple.”

Source: New York Times

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