35offsuit

Mortgage Default and Skin-In-The-Game…and Why This Correlation is Wrong!

While the correlation between downpayment and default may be weak, what is not weak is the correlation between equity (or lack thereof) and default.

The world has changed tremendously in thirty years. A person who owes $200,000 on a home worth $120,000 will walk away from that home today. They may not have in past years.

Why not?

We are a more transient society. People don't tend to live in the same house for 30 or 40 years. They may not know their neighbors. The tie to the home is not as strong.

We have become a society that forgives, even encourages, defaulting on debts. The moral and ethical tie to debt repayment is far weaker than in past years.

So, when an individual owes $80,000 more than their home is worth - and then they look at their $15,000 401k balance - the math becomes easy. The "right" economic decision is to walk away from that debt. The ramifications will be light in comparison. In a relatively short period of time, their credit will be restored and they will again be able to buy a home.

As more and more people watch as this occurs and realize that they are fools to defend their upside down mortgage, the trend grows greater and greater.

Ironically, all the blame directed toward the lenders is providing cover for the borrowers to take the easy way out.

This problem will last for a decade - and we haven't seen the worst of it - not even close.