Study: 'Strategic Defaults' Increase as Negative Equity Rises

As 'negative equity' increases home owners are increasingly likely to default on their mortgages — even if they can afford to pay them, according to a recent academic study. Research conducted by Northwestern University and two other colleges found that homeowners who bought more than five years ago are less likely to default. They also found that "young people" are less willing to walk away, a finding they call surprising. "The young are more dependent on the loans market and thus face higher reputation costs from defaulting," they write. When a household that can still afford to pay the mortgage purposely hands in the keys it's called a "strategic default." The study says that "no household" is willing to default if the equity shortfall is less than 10% of the value of the home — but when the underwater position reaches 50% (which has occurred in some markets, notably Florida and Nevada) then 17% of consumers will engage in a strategic default. Researchers Luigi Guiso, Paola Sapienza and Luigi Zingales write that 80% of "people think it is morally wrong to do a strategic default." The authors add that even "amoral people can choose not to default when it is in their narrow economic interests to do so because of the social costs this decision entails."