Homeowner Defaults: The Inevitable Truth Behind the Mystery

Here’s a mystery: Homeowner defaults. Not that there are so many…the mystery is why there are so few…

In Nevada, for example. Two out of three homeowners are underwater…which is hard to do in the desert. Some of them owe hundreds of thousands of dollars on something that doesn’t exist anymore – the equity on their houses. Still, most of them continue making mortgage payments. What gives?

It’s a case of “asymmetrical ethics,” says The New York Times. Lenders don’t hesitate a minute to maximize their earnings – using every tool available to them and every trick in the book (including some tricks that have never been published). They default whenever it suits them.

But homeowners? They plod along. Maybe they think their house will come back in price. Maybe they think they’ll suffer some awful penalty if they default. Maybe they are just too proud and too honest to take advantage of the non-recourse mortgage provisions. So, they keep paying.

But for how long? Mortgage rates are based upon past behavior. In the past, people regarded mortgage payments as an inescapable, moral obligation. You paid as long as you were able.

It won’t be long before the ethics of Wall Street catch on all across the country. Gaming the mortgage system will become as common as signing up for food stamps. When people see that house prices won’t go back up…and when they see their neighbors shedding hundreds of thousands of dollars’ worth of mortgage debt – and getting away with it – they won’t be far behind.

The Daily Reckoning