Millions of Americans have negative housing equity, meaning that the outstanding balance on their mortgage exceeds their home’s current market value. Our data show that the overwhelming majority of these households will not lose their homes. Our finding is consistent with historical evidence: we examine more than 100,000 homeowners in Massachusetts who had negative equity during the early 1990s and find that fewer than 10 percent of these owners eventually lost their home to foreclosure. This result is also, contrary to popular belief, completely consistent with economic theory, which predicts that from the borrower’s perspective, negative equity is a necessary but not a sufficient condition for foreclosure. Our findings imply that lenders and policymakers face a serious information problem in trying to help borrowers with negative equity, because it is difficult to determine which borrowers actually require help in order to prevent the loss of their homes to foreclosure.I think this makes a very important point that I have believed throughout the mortgage crisis. People don't just walk away from a home because their mortgage balance is more than the value of their home. The reason is that most homeowners have an emotional connection with their home. They love their home.
In addition, not only is moving a big hassle—especially if you have lots of stuff—but for parents it potentially means taking their children out of their school and away from their friends. Homeowners tend to go into foreclosure only when they have negative equity and can no longer afford the payments.
One caveat with the above study is that the late-80's bubble that this research is based on is minuscule compared to the bubble that exists across much of the U.S. today.
Hat tip to Calculated Risk.
I'm curious to know what readers think. If you owned a home with substantial negative equity, would you walk away from it even if you could afford the payments?
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