Study Calls Locked-In Borrowers a Myth

A study from the Federal Reserve Bank of Cleveland says the claim that Americans whose homes were underwater were unable to relocate for job purposes was a myth.

After the financial crisis, the number of homeowners who relocated from one state to another declined. Some people suggested that the decline in mobility rates was caused by homeowners being locked in to their underwater homes, contributing to higher unemployment rates.

The Cleveland Fed said the data used in those earlier studies had many limitations. So by using anonymous data from two major credit bureaus, a team of researchers was able to obtain information about the mortgage debt of tens of millions of individuals. They found compelling evidence that equity in a home is not a crucial part of the decision to relocate for a job.

Yuliya Demyanyk, an economist with the Cleveland Fed, said, “If an unemployed homeowner with negative equity is able to find a job in another region, he or she is likely to accept the job because the benefits of earning a higher income outweigh the costs associated with selling an underwater home.”

If anything, the underwater borrower was more likely to move compared with a borrower who had equity in the property.

A more plausible explanation for the lack of movement is that Americans faced almost uniformly dismal employment options across the country—opportunities to move for good jobs were few and far between, she said.

Even more telling is that the Cleveland Fed study found that when it segregated out and only looked at nonconforming loan borrowers—those with subprime mortgages, alt-A mortgages, jumbo prime mortgages or mortgages originated for financing noninvestment properties only—its conclusions still held water and that it was not the negative equity situation that held these homeowners from relocating.