Q: What percentage in dollar volume of loans can be modified in a way that benefits both borrower and lender/owner?
David L. Moskowitz: I don’t have a percentage, but I know a lot of this is driven by employment and life claims. With these denominators, there is a higher percentage of win-win loans, as we have learned.
Q: Is it unethical or immoral for a borrower to walk away from an underwater home borrowing loan? There was recently a news section about somewhere in Cleveland where many people, even though they knew they were way under water, said that they really believed in the sanctity of their contract and that they were going to continue to pay and not go in default. Why would this be?
David L. Moskowitz: I saw that piece, it was quite compelling. In fact, 60% of underwater customers have never missed a payment. It is just not something that people want to do. I do not really have the psychology on this. People have seen the housing market go up and down and don’t know how they will behave at a high or low point. In the end, it all comes down to affordability: if you can afford to pay, you will.
Nancy E. Wallace: I mostly look at subprime pools, and even in there people are making very steady payments. The loans are 3-400% over the value, and yet they carry on making periodic payments. And we are talking about by far the majority of people in these pools. The large majority of borrowers are making steady payments on interest rates that are so high they cannot refinance. This speaks to the point of people’s willingness to hang on no matter what.
Paul Leonard: I am continuingly amazed by the phenomenon described here: homeownership as a sociological phenomenon rather than just a financial investment. Homes are where people live, where their kids go to school, etc. There is a sense of morality that comes with making your mortgage payment. On the other hands it surprises me that we haven’t seen more people say that they are subject to a foreclosure proceedings when they cannot make their payments anymore. From the people that are underwater, I have been surprised that there haven’t been more who have decided: this is not a situation that is financially good for me.
Laurence Platt: As a lawyer, I think it is interesting that if a borrower was to do that voluntarily, it is very hard for them to get to that next task. Rental housing is scarce and going up in price. There is a bit of a cost-calculus of what is going to happen next.
James Rhyne: That cost-calculus is driven by a lot of ignorance. The current legal system is not giving them a lot of security.
As a footnote, there is a subdiscipline in economics called behavioral economics, which has discovered a lot of non-rational economic behavior. I strongly recommend a book Daniel Kahneman, Nobel Prize winner in economics, called Thinking, Fast and Slow.
David L. Moskowitz: Don’t underestimate the economic calculus that goes into the impact on your family. People want to preserve the stability of their families. This is why co-ownership is so important. This is why people might continue to pay loans even if they are underwater, just because they can. People will rather opt for that.
Paul Leonard: From what limited evidence exists about strategic default, there have been some studies that the most likely strategic defaulters are people with higher incomes. It is not the average Joe, it is those who are most sophisticated about it. I would suggest that if you are counting on being able to qualify for a loan modification on the basis of defaulting, you would be taking a huge risk that you will not get the modification and loose your house. This is another mitigating factor for this behavior.
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