Industry NewsMortgage

Underwater homeowners hanging on

Research: Rational borrowers weigh 'strategic default' carefully

Learn the New Luxury Playbook at Luxury Connect | October 18-19 at the Beverly Hills Hotel

Fears that droves of underwater homeowners will walk away from their homes in "strategic defaults" may be overblown, research by economists at the Federal Reserve Bank of San Francisco suggests.In California, Florida and Nevada, more than one in five mortgages have principal balances that are greater than the estimated value of the homes that serve as collateral on the loans.Borrowers who can afford to make their monthly mortgage payments, but choose to stop making them because their home has become worth less than they owe, are said to be engaging in strategic defaults.But depending on how deeply they are underwater, many of those borrowers still have an economic incentive to stay in their homes, John Krainer and Stephen LeRoy said in an Economic Letter published Monday.A homeowner who has no apparent equity in their property, because they owe as much as their home is worth, is in a "heads-I-win, tails-you-lose" situation with their lender, Krainer and LeRoy write....