Richard Thaler on mortgage defaults. Why so few? Will there be more?

In his latest Economic View column, Richard Thaler offers his thoughts on mortgage default rates and why homeowners stay underwater.

Much has been said about the high rate of home foreclosures, but the most interesting question may be this: Why is the mortgage default rate so low?

After all, millions of American homeowners are “underwater,” meaning that they owe more on their mortgages than their homes are worth. In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.

A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.

Keep reading in the full column here.


2 Responses to “Richard Thaler on mortgage defaults. Why so few? Will there be more?”

  1. Paul Brandon Says:

    Obviously many factors at work, but there seems to be an assumption that most mortgage holders even know all the legal and financial details of their contracts, much less make a calculation (rational or otherwise) of the comparative costs of defaulting or holding on.

    Definitely elements of delay discounting here — there are high immediate costs of moving, and of losing the (perceived) value of the home (locking in a loss, even if it is less than the long term loss that would be avoided by defaulting).

    So, most people will hang on to the home and tell themselves that its value will recover, rather than accept the immediate costs of moving and surrendering the title to a home.

  2. James Mucci Says:

    Another factor is that in many states the amount of money that is lost due to foreclosure, may still be owed to the bank.

    Many people feel obligated to pay as agreed. If everyone who was underwater walked away, the remaining homes would be worth much less, and essentially destroy any chance of housing recovery.

    Walking away because you don’t “want” to pay is not going to help anything.

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