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"Walk Away" Survey Shows 26% of Defaults Are Intentional
July 21st, 2009
According to Moody’s, 30% of
homeowners with a mortgage owe more than their homes are currently worth. In an
interview with Professor Luigi Zingales from the
According to Mr. Zingales, a tremendous amount of people are experiencing
mortgages that are worth more than the current value of their house. It’s not
just in the range of ten to twenty thousand dollars but significantly higher in
the $100,000 to $150,000 range or more.
Professor Luigi Zingales has conducted a survey to determine at what price
they are willing to walk away. His survey is based on the moral and community
hazards of home defaults. He states that these results are important to
consider when designing new government policy.
According to Zingales, 26% of defaults today are done by people with
strategic intention. These people can afford to pay their mortgages but walk
away because their house prices are significantly worth below their mortgage.
Below are the results of his survey:
- Homeowners are NOT willing to walk away if their
homes are worth 10 to 15% below their mortgage.
- Homeowners start to walk away when their homes
are more than 15% below their mortgage. They are also influenced by the
behaviors in their own neighborhood.
If you see a lot of people in
your neighborhood walking away, you are more likely to walk away since it
becomes a norm or trend.
- 80% of American people think that it is immoral
to walk away but nevertheless they do it. When people walk away from their
homes, they impose an enormous cost on their neighborhoods and the overall
economy.
Professor Luigi Zingales proposes a solution termed “Debt for Equity Swap”
for banks in Wall Street to use it on modifications at household levels. He
proposes a pre-packed bankruptcy legislation that will allow homeowners to pay
a mortgage based on current property prices in exchange of giving up 50% upside
in the future.
9 million of households are
in trouble. Currently, there are only 650 bankruptcy judges in the whole of
In this video, Professor
Luigi Zingales explains his proposed version of
“Debt-For-Equity Swap”, another form of modification intended for household
levels.
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