The New York Times has an interesting piece by Richard Thaler on the rational decision (strategic default) to stop paying a mortgage by households that are seriously “underwater” (in negative equity to us Irish folks). The focus is particularly on states in the US where nonrecourse mortgages are the norm. These are loans where the only liability recurring to the borrower is the house itself. There is also an interesting discussion of the contagion effects of defaulting, in that it may only be when people perceive defaulting to have lost some of its social stigma that a new larger wave of defaults will begin. One thought-provoking solution put forward by a Law Professor and Economist from Chicago involves a loan modification system, where banks would be forced to renegotiate mortgage payments so that the borrower would only pay a mortgage based on something like the new decimated market value of the property.
I imagine the discussion of strategic defaults is less relevant to Ireland given our tougher bankrupcy laws etc, although anyone with more knowledge of that system is welcome to correct me. The loan modification idea is surely something that could be taken on stream to help those in Ireland that took out mortgages around 2006/07.
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