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CU System
More walk on mortgages but keep second mortgage
MADISON, Wis. (12/28/10)--More U.S. citizens than ever are willing to walk away from their underwater homes (homes for which they owe more in mortgage payments than the home’s worth), according to a recent Harris Interactive survey commissioned by Trulia and RealtyTrac. Such a move, dubbed a “strategic default” by the real estate industry, refers to people who decide to walk away, even though they can technically afford to continue paying off their mortgage (msnbc.com Dec. 20). Almost half, 48%, of homeowners who have an underwater mortgage said they would consider walking away from their home, the survey indicated. Six months ago, a similar survey indicated just 41% of respondents would do so. “It’s a phenomenon we haven’t seen before in the housing market,” Rick Sharga, senior vice president of RealtyTrac, told msnbc. “The mindset of why people purchase a home has changed over the past decade.” Credit unions also may be interested that in a second study conducted by researchers at the Federal Reserve Bank of Philadelphia that one in five borrowers who fall into foreclosure on their first mortgage, indicated they would continue to pay their second-lien mortgage (The Wall Street Journal Dec. 20). Although banks are likely to foreclose on borrowers when they stop paying a first mortgage, second-lien holders have little incentive to foreclose on underwater borrowers because their debt has little or no value. “Given the large number of current homeowners with negative equity, there are likely a large number of borrowers who could default on their home equity loans without being forced into foreclosure if they continue to pay their first mortgage,” the study’s authors write. However, their research indicates that isn’t happening: “Borrowers rarely engage in this strategy even though it appears to be viable,” the study reported. “Given the degree of second liens that have been underwater during the current mortgage crisis and given that second-lien holders are not likely to foreclose on many of these underwater second liens, it is surprising to find that the default rate for first-lien mortgages far exceeds the default rate on the second-lien mortgage for the same property.” To read the articles, use the link.
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