by Calculated Risk on 2/02/2010 09:03:00 PM

“We’re now at the point of maximum vulnerability. People’s emotional attachment to their property is melting into the air.”
Sam Khater, senior economist at First American CoreLogic.

From David Streitfeld at the NY Times: No Aid or Rebound in Sight, More Homeowners Just Walk Away. A few excerpts:

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.
...
The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

Streitfeld is referring to the recent negative equity report from First American CoreLogic, see: Negative Equity Report for Q3

Some excerpts from that report:

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

The rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.

Here is figure 4 from the report.

The default rate increases sharply for homeowners with more than 20% negative equity.

As Streitfeld noted, there are an estimated 4.5 million homeowners with more than 25% negative equity. According to the chart, maybe only 10% of them are currently in default. If, as First American CoreLogic senior economist Sam Khater said, "people's emotional attachment to their property is melting into the air", then we might see a surge in defaults by homeowners with negative equity.

And more from the NY Times:

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

Benjamin Koellmann paid $215,000 for his apartment in Miami Beach in 2006, but now units are selling in foreclosure for $90,000. “There is no financial sense in staying,” he said.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”