Unemployment and other factors have caused many homeowners to involuntarily default on their mortgages. At the same time, falling home prices, the possibility of being underwater for many years and advice from real estate experts may have encouraged others to simply stop paying, with deleterious consequences in some markets, according to a study released today by the Mortgage Bankers Association (MBA).
The study examines the factors that can lead to mortgage default, the role that influential members of our society play in people’s decision to stop paying their mortgage, and the impact on the broader housing market.
“Recently, the overwhelming media coverage of the current financial crisis has made homeowners aware – or at least alerted them to become aware – of their equity position in their home,” said Michael Seiler, who conducted the study. “While the merits of such a choice can and will continue to be debated, what is indisputable is that the possibility to strategically default has certainly been brought to the attention of current homeowners like never before, with potentially negative consequences for housing markets,” said Seiler.
Key findings from the study include:
Strategic default is a result of a borrower’s unwillingness to pay, even if able.
Ideas are transmitted through the population in ways “similar to those in which diseases are transmitted.”
Real estate experts can influence market dynamics, but not in all cases. Markets are strong or weak due to fundamentals, however, markets in between can be pulled down or lifted up depending upon individual and expert behavior.
The study highlights those factors that distinguish an “economic default” (caused by hardship) from “strategic default” (selected as an option by homeowners who may be underwater on their mortgage), and the methods by which an idea such as “strategic default” can be transmitted through a population by contact with individuals and through social networks. Through simulation modeling, the authors demonstrate that because defaults and foreclosures lead to lower home prices, an epidemic of strategic defaults initiated by advice from those who might be considered experts can lead to the collapse of a housing market.
“Housing pundits share their expert opinion with a large audience on a frequent basis through the media. These social networks create the potential for much faster disease spread/cure than in the past. They can greatly impact mortgage markets through their use of behavioral advocacy. In fragile markets, advice by those considered to be experts can result in a flood of strategic defaults causing a contagious downward spiral of home prices and potentially a market collapse,” said Seiler.
“Whether by choice or necessity, as foreclosures increase, they have an increasingly negative impact on the price of the healthy homes around them,” said Selier. “One default does little to negatively impact the price of surrounding homes. However, as more and more mortgages in the neighborhood go into default, the negative impact is felt at an increasing rate. Much the same way as a disease spreads throughout a population, so, too, do decisions to ‘strategically’ default.”
To access a copy of the report, please visit the RIHA website at www.housingamerica.org.
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