A new paper on walk-aways (i.e., defaulting on a mortgage whose payments you can still afford because it exceeds the value of your home) has been making the rounds, which means another opportunity to wheel out those debunking skills.
The study -- a copy of which I've read but haven't seen on the web anywhere -- was conducted jointly by credit bureau Experian and consultancy Oliver Wyman and claims to use "extremely stringent" criteria in identifying strategic defaults, i.e. homeowners who are financially able to make mortgage payments but choose not to:
We define such borrowers as those who rolled straight from current to 180+ [days past due], while staying current on all their non-real estate debt obligations, 6 months after they first went 60 [days past due] on their mortgage.
Using this filter, Experian-Wyman mined 24 million credit histories and found that 17% of defaults in 2008, or about 588,000 defaults, were strategic. That figure is almost three times as large as the result from a Boston Fed study looking at walk-aways in Massachusetts during the early '90's, when home prices fell 20%. (This discrepancy isn't completely surprising since Massachusetts is a recourse state.) But Experian's 17% is smaller than the 26% claim made by this academic study using survey data.
I'd argue, however, that Experian-Wyman's figures still overstate of the number of walk-aways. That's because the criterion used in the study assumes that not missing payments on non-mortgage liabilities is a sign of financial health.
But as this recent paper by Ethan Cohen-Cole and Jonathan Morse, which uses data from Experian competitor Transunion, shows, when people face financial hardships they're likely to become delinquent on their mortgages before their credit cards.
For years, the conventional wisdom in the consumer funance industry has been that a consumer will pay their mortgage bill long after they have gone delinquent on other financial obligations. This paper finds strong evidence that many individuals in fact make the opposite choice, paying credit card bills even at the cost of mortgage delinquencies and foreclosures.
And the places where people are most likely to choose credit cards over mortgages are the areas with the biggest drops in home prices: California, Florida, Nevada, etc.
Bottom line: It's highly unlikely that cracking down on strategic defaults would result in a 17% or 26% decline in foreclosures.
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COMMENTS (1)
I'm sympathetic to your reading of this methodology. However, paying consumer-credit bills and not paying one's mortgage is a choice, and thus a strategic allocation of resources. The fact that this behavior is more prevalent in areas where housing values have dropped, and thus mortgages are more likely to be underwater, tends to reinforce the notion that this is a form of strategic default. Why have these people made this particular choice among which bills to pay? Precisely because of the incentives cited to explain the phenomenon of strategic default.
Now, if there were a way to quantify the anecdotally increasing number of people who keep current on credit card payments because that's th ... view full comment
I'm sympathetic to your reading of this methodology. However, paying consumer-credit bills and not paying one's mortgage is a choice, and thus a strategic allocation of resources. The fact that this behavior is more prevalent in areas where housing values have dropped, and thus mortgages are more likely to be underwater, tends to reinforce the notion that this is a form of strategic default. Why have these people made this particular choice among which bills to pay? Precisely because of the incentives cited to explain the phenomenon of strategic default.
Now, if there were a way to quantify the anecdotally increasing number of people who keep current on credit card payments because that's the only way to buy groceries, that would be an interesting way into this data that might actually contradict the claims of strategic default. For those people, keeping current on consumer debt is not a sign of ability to pay mortgage and a choice to default; it is a sign of the choice to abandon shelter in favor of food, which is evidence of extreme economic distress, and just about the last "choice" anyone gets to make before becoming destitute.