Foreclosures are Ripping Away the Moral Fabric of Homeowners
The situation is indeed a tricky one. As the American economy goes through one of its deepest recessions and unemployment rises, foreclosures have become very common. Now the question that arises is will a resident default on his mortgage payment if he had the option of making the monthly payment?
According to research conducted by the Booth School of Business and Kellogg School of Management, the answer to this is not very easy. The research has underlined that 26 per cent of the loan defaults are very strategic decisions – an attempt by homeowners to escape payment as their home values plunge below than what they owe to their banks.
According to Zillow.com, 22 per cent of homeowners are underwater. This means their mortgage amounts are more than their home values are worth. In certain areas of Nevada and California, more than 50 per cent of homes have negative equity. In certain areas, the deficit is mind-boggling. For instance, in the Salina, Calif area, the median equity of homes that were bought during the boom, has now become a negative $214,305, the study revealed.
Co-authors Paola Sapienza, Luigi Zingales and Luigi Guiso took interviews of 2000 residents to substantiate the view that although morality has had a constraining effect, yet negative equity is leading many to default on loans deliberately. The researchers also studied the effect of federal policies on foreclosures that touched a record high of 3.1 million.
Perhaps what touches the heart strings is that although 81 per cent homeowners feel that it is morally wrong to deliberately default, yet the a high percentage of owners crumble when the amount of negative equity grows wider. For instance, seven per cent of those who said it is immoral to deliberately default on mortgage payments, are prepared to walk out once the negative equity climbed to $50,000. At $100,000, 22 per cent said they would walk out of their homes. Once the negative equity climbed to $200,000, thirty seven per cent said they would have no qualms about defaulting while 38 per cent said they would default once the figure touched $300,000.
Of course, those who did not have the moral values the percentage rate was much higher. Twenty per cent of this group said they would default once the negative equity touched $50,000 while 41 percent said they would default once the negative equity became $100,000. It’s time the administration looked into this.
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