Strategy or emotion – what’s driving defaults?

A recent Wall Street Journal article, Emotion Drives Many Defaults, reviews interesting new data on why people are defaulting on mortgages. For some, default is a rational response by homeowners who owe far more than the current value of their homes. For others, the reasoning is purely emotional, ranging from frustration and helplessness, to anger with banks and the government.

The article also notes that the “stigma against default remains robust” with the majority of people continuing to make payments for as long as they can, but I wonder how long this can continue. Loan modification programs are not providing much help or hope, and seem to be wearing down homeowners who really want to do the right thing.

The article suggests “a rent based loan program” to help homeowners who are in trouble. It’s an interesting and viable idea, but only a drop in the bucket. That said, every drop helps fill the bucket. I’m starting to see small improvements in the real estate market. In my neighborhood (Los Angeles), houses on the market are selling faster and the values seem to be increasing slightly. I am cautiously hopeful that this is the start of a more controlled recovery.

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