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Study: Unemployment Bigger Cause of Mortgage Default Than Previously Thought

Many mortgage lenders probably believe that homeowners default on their mortgages because they have negative equity, i.e. they’re underwater. In other words, these homeowners can afford to repay their mortgages but simply choose not to, and there’s a surprising amount of academic literature to that effect. Why “strategic default” is a bad idea for debtors is a separate topic, but a recent study has found that contrary to the previous research on the subject, a mortgagor’s ability to pay for a mortgage plays a more important role in mortgage default than previously believed. The finding validates what any New York bankruptcy lawyer will tell you: Debtors aren’t cheaters. They want to repay their debts.

So what does the study say, and why does it challenge the pre-existing view?

The problem academics have encountered when assessing the causes of defaults is that they tend to coincide with large economic shocks. A homeowner might lose a job at the same time his or her house loses substantial value. At that point a default might be both strategic and unavoidable. To address this, the researchers used panel data connecting households’ demographic and financial information with their mortgages, allowing them to assess the effects of mortgagors’ incomes on defaults. Prior studies focused only on mortgage information, making this kind of comparison impossible and leading the authors to focus on negative equity.

The authors classified 38 percent of defaulting homeowners as strategic defaulters, which is somewhat surprising. Of the rest, they estimated that when the head of a household loses a job—whether due to a layoff or an injury—it’s the equivalent of instantly losing 35 percent of the home’s equity. If both the head of the household and a spouse lose their jobs, it’s as though they lost half their home’s equity. Thus, we can see why big recessions cause large waves of defaults.

Curiously, the researchers also found that up to 90 percent of borrowers with limited abilities to pay their mortgages did so anyway. The low default rates for low-income homeowners discourage lenders from renegotiating mortgage loans and instead motivate them to wait for defaults to occur. Fully one-third of defaulters would need 100 percent loan reductions to stay afloat. Consequently, the authors conclude that loss mitigation would help struggling homeowners more than principal reductions.

A synopsis of the study can be found here.

The lesson for homeowners struggling to repay their mortgages is that lenders probably won’t negotiate and will wait for defaults to occur. If your mortgage is becoming too much of a burden for you, then a better alternative is to discuss your situation with an experienced New York bankruptcy lawyer.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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