Thursday, September 4, 2008

Mortgage Default Economics

mortgage default

To default or not to default. That is the question.

Answer: If your house value falls sufficiently below your mortgage loan simple good business indicates that you should, indeed, default. When houses again regain value you would be financially better off defaulting than you would be by simply continuing your payments and waiting for recovery. The figure makes it clear.

It would be greatly to the lender's advantage to renegotiate the mortgage with the borrower. The lender could save himself the cost of foreclosure and resale of the property that way. Any rational lender would do so rather than foreclose. But the packaging of mortgages has decoupled lenders from borrowers thus precluding this remedy.