It is easy in the current economy to assume that most consumer foreclosures on personal residences are due to the economy. Unemployment is high and even household where lay-offs have not hit are operating with less income due to reduced schedules and forced days off without pay.
The reality is that not all foreclosures can be blamed on the economy though. Some foreclosures would have happened in a good economy too because it is the consumer’s behavior and financial decisions that got them to the bankruptcy point. That is what two University of Alabama at Birmingham and one University of Florida professors found when they reviewed 7,000 mortgage records. (Birmingham News, Page C4 10-Jan-2010). Of the 7,000 home mortgages reviewed, there were 239 that ended up in foreclosure.
The question was: Why do foreclosure rates differ from neighborhood to neighborhood when comparing neighborhoods where the incomes and average house prices are close to the same? In some cases, slightly wealthier neighborhoods have higher foreclosure rates which indicates it is not income that always plays the largest role in determining financial health.
A report was prepared called “Behavioral Determinants of Mortgage Default”. In this report there are two neighborhoods cited as examples of how consumer spending habits impact foreclosure rates. One neighborhood named Center Point is compared to a different neighborhood named East Lake that is only a few miles away. The Center Point neighborhood has a higher home loan default rate at 6.2% even though incomes and house values are higher.
The East Lake neighborhood has a 4.7 percent default rate despite being less wealthy.
One of the explanations for the varying rates may lie in the demographics of home buyers purchasing the homes and the differences in the methods of decision making. The Center Point homeowners are younger and more educated than the East Lake homeowners. Many of the homes in Center Point were purchased as starter or first homes. East Lake homeowners are older on the average. They also do not own as many cars and have owned homes longer.
All of this indicates that consumer financial decision-making impacts the odds of a home going into foreclosure. Home mortgages from neighborhoods all over Jefferson County, Alabama were reviewed ranging from the wealthiest to less affluent. Probably one of the most useful and interesting facts that emerged from the study is that many consumers choose not to pay their mortgage when they get into financial trouble and instead spend money on other things. In other words, they purposely give up the home by forcing it into foreclosure.
In the study, 26% of the mortgages fell into this category. That is a surprisingly high number. This kind of information is invaluable for helping mortgage companies and credit counselors understand the consumer decision making process leading to debt defaults. If the numbers reported in this study hold true across the nation, it means there are millions of consumers purposely avoiding their obligation to pay the mortgage payment.
The goal of this study and others that are being done on consumer behavior during the recession is to identify ways to help consumers and lending institutions make better decisions. The hope is that the economic crisis facing homeowners today will not be repeated in the future.
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