YOU GOT TO KNOW WHEN TO HOLD’EM, KNOW WHEN TO FOLD’EM, KNOW WHEN TO WALK AWAY, KNOW WHEN TO RUN.
RUMSON, NJ–(Marketwire – December 7, 2009) – Over the past year, four major studies have presented evidence suggesting that the vast majority of underwater homeowners will lose their homes before the end of the housing crises. Roughly 81% of Las Vegas’ homeowners have negative equity. At the end of this housing crises, will 81% of those Las Vegas’ homeowners voluntarily or involuntarily lose title and possession of their homes?
At no time in United States history has a community ever sustained negative equity in its homes. Las Vegas is not going to be the first such community. As such, within a few years, the vast majority of this years Las Vegas’ homeowners will have lost their homes.
With an estimated 29% of all U.S. mortgages, and 81% in Las Vegas, currently in a position of negative equity, the issue of strategic mortgage default is fast becoming one of the biggest problems faced by mortgage security investors, loan owners and servicers as well as the current administration. According to a new white paper released today, however, existing solutions for the mortgage industry’s strategic default crisis can’t solve the problem because they are too cumbersome, a burden on the servicers, and ignore the consumer’s behavioral response to the problem of negative equity reported in a study called Strategic Default and The Role For Incentive Based Solutions .
The white paper, authored by Alex Edmans, Assistant Professor of Finance at The Wharton School of the University of Pennsylvania, addresses the behavioral aspects of strategic default in terms of an approach that provides incentives for borrowers to remain current on their mortgages without the need to reduce principal through a loan modification.
Professor Edmans, who is an academic advisor to LVG as well as a behavioral economist and noted expert in incentive structures, said, “The government and loan owners are currently pursuing a number of existing solutions to default. However, they have so far proven to be ineffective for two main reasons. First, certain solutions are founded on the idea that default occurs because households have no choice due to insufficient income, and thus fail to address default that is a rational choice that depends on the homeowner’s balance sheet. Second, certain solutions face substantial practical hurdles to implementation.”