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Why Foreclosures Happen (It's Not Always What You Think)

Written By:
June 04, 2010 at 3:03 PM

As most people know by now, foreclosures are rampant in the United States due to a housing "crisis" and a recession. A little known fact, however, is that as many as one-third of these foreclosures may arise from willing abandonment. This is when a homeowner makes a conscious decision to abandon a home, even though a bank has not officially started a foreclosure process. This enigma is called "strategic foreclosure" or "walkaways" in the industry. It usually occurs when a homeowner's debt on the home far exceeds the home's market value (this is known as negative equity.)

Survey Findings

According to a quarterly report by the Chicago Booth / Kellogg School, the percentage of foreclosures that were probably "strategic" was 31 percent in the first quarter of 2010. That figure increased from the previous quarter, when it was 22 percent.

April 2010 marked the sixth release of the Chicago Booth / Kellogg School survey. The school studies public opinion and publishes the findings in its "Financial Trust Index."

According to the survey, the likelihood of strategic default increases 23 percent if the homeowner discovers that a neighbor with negative home equity received a loan "for forgiveness." If the homeowner discovered an alternative method of financing a new home, the likelihood of strategic foreclosure increased by 29 percent.

Moral and Social Restraints

Historically, moral and social restraints have played a large role in whether or not a homeowner will keep his or her obligation on a loan. Moral and social restraints might include everything from religious affiliations to a sense of duty, community and family ties, personal integrity and valuing the opinion of others. What the participants' answers seem to suggest is that extenuating circumstances sometimes trump these restraints, or to quote an oft-used phrase: "Desperate times call for desperate measures."

For example, one of the biggest reasons given by most homeowners for not wanting to default on a loan is the repercussion of a damaged credit rating due to foreclosure and late payments. 74 percent of participants said they believed a good credit rating was important. The survey found that out of all participants, none would default if the home value was 10 percent less than the loan amount. However, the same participants said if the equity shortfall reached 50 percent, they would probably abandon the home. Participants also related that if there were a large number of foreclosures in their neighborhood, this might influence their decision to abandon a home.

Trust in Financial System Low While Fears Increased

Only 23 percent of the survey participants believed that the American financial system was trustworthy. This figure was down from the previous quarter, when it was 25 percent. Among the fears expressed by the participants were: fear of the stock market falling or being overvalued and a fear of becoming unemployed. More participants than ever indicated a desire for greater regulation of the financial industry and more corporate oversight.


Projecting the survey findings to the country at large reveals a public more willing to abandon their homes when they feel pressured to do so by falling home values and extenuating circumstances. Based on past performance, it's safe to say the American spirit and dream of homeownership will never "go quietly into the night." Even in the midst of the Great Depression, the majority of homeowners clung to their homes until the "bitter end," doing whatever was possible to try to bridge the gap when faced with shortfalls of income and / or equity. This is still true today, with many homeowners taking second or third jobs and "making do" with less.

Other positive steps that can be taken by struggling homeowners (and which have been taken by millions during the past two years) include mortgage refinance or a loan modification. These are two options that the Obama Administration has addressed with its Home Affordable Modification (HAMP) and Federal Housing Administration (FHA) programs.





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  • June 11, 2010 at 9:42 PM PST
    Great article!

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