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: Mortgage Lender Implode-o-Meter

When Underwater Homeowners Walk Away

By Implode-Explode Heavy Industries

"After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home?s value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the ?double-trigger? theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest."

Full post as published by Mortgage Lender Implode-o-Meter on June 22, 2010 (boomark / email).