Jingle Mail, Jingle Mail, Jingle All the Way to the Bank!

The national economist for Fannie Mae was the key note speaker for a Las Vegas convention last year. The speaker was expected to finish with some really positive notes which he failed to relay. In fact he was one of the first Fannie Mae officials to say "This is Going to get Really Bad." He had made mention as interest rates rise, loan products go away home buying frenzy will be closer to a normal market. Then he confided in the audience of three thousand attendees and said with recession and economic issue on a national basis one of there biggest nightmares would potentially happen. That nightmare is when it becomes a badge of courage to let your home go. Rather than mailing a mortgage payment to the lender, the homeowners mails the lender the keys to the home. This nightmare is known as 'Jingle Mail' it happened before, it will happen again.
New research found that more than 25% of mortgage loan defaults are strategic -- that is, a quarter of homeowners who default on their mortgages are walking away from their homes even if they can afford to make their payments.

Homeowners are especially motivated to walk away when home values have fallen by more than 15%, according to a new paper, "Moral and Social Restraints to Strategic Default on Mortgages," by researchers at the Kellogg School of Management at Northwestern University, the University of Chicago Booth School of Business and the European University Institute. Data were collected within the last six months as part of the Chicago Booth/Kellogg School Financial Trust Index, a quarterly indicator of the amount of trust Americans have in private institutions in which they can invest their money.

"Housing policy under the current administration has focused on reducing households' cash flow problems in response to the housing crisis, but no one has addressed the negative equity issue as part of public policy regarding housing," said Paola Sapienza, a co-author of the paper, in a news release. "We're in a completely different economic environment today, where for the first time since the Great Depression millions of Americans have mortgage loans that exceed the value of their home."

"As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans," Sapienza said. "This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe."

The report found that homeowners often won't default as long as negative equity doesn't exceed 10% of the value of the home. However, 17% of households would default -- even if they could afford their mortgage payments -- when their equity shortfall reaches 50% of the value of their home, according to the paper. In numerous housing markets, home prices have suffered declines of more than 30%.

Aside from their equity situation, researchers said that the local housing market also plays a role in whether a homeowner underwater on a mortgage feels comfortable walking away. And people are more likely to strategically default if they know someone who took the same sort of action.

"Our research showed there is a 'multiplication effect,' where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically," said Luigi Zingales, a co-author of the paper, in the release. "In fact, the predisposition to default increases with the number of foreclosures in the same ZIP code." That's a common factor when the Creation of the ever growing popularity of Jingle Mail comes into the housing equation.

-Christopher Rockey