Fig. 1

Foreclosure fault line

By Lydialyle Gibson

Graphic by Allen Carroll

Two years after the housing bubble burst, millions of Americans find themselves with an equity shortfall—tied to mortgages that exceed the value of their homes. The temptation to walk away, despite an ability to make their payments, is strong, especially as homeowners see neighbors slip into foreclosure. In a July National Bureau of Economic Research paper, Chicago Booth economist Luigi Zingales surveyed 2,000 homeowners and found that one deterrent to “strategic default” is morality. Eighty percent said intentionally defaulting was wrong.

That barrier softens as the number of nearby foreclosures rises. The percentage of respondents who told Zingales they’d default if their equity shortfall reached $50,000 or $100,000—9 and 26 percent, respectively—was relatively stable until the foreclosure rate in their ZIP code climbed past 5 percent. Then increasing numbers became willing defaulters.

Return to top