The Shape of the Recovery, Joseph S. Tracy, Executive Vice President, Remarks at the Connecticut Business and Industry Association/MetroHartford Alliance Economic Summit and Outlook, 2011, Hartford, Connecticut
“The combination of declining house prices and increasing delays in the foreclosure process will put upward pressure on default rates as well as losses on defaulted mortgages. CoreLogic estimates that in the third quarter of 2010 there were 10.8 million borrowers in negative equity where the balance on the mortgage exceeds the current value of the property. They estimated that there were an additional 2.4 million borrowers estimated to be in near negative equity where the borrower has less than 5 percent equity remaining. Declining house prices will push these near negative equity borrowers into negative equity. This increases the risk that these borrowers will default on their mortgages either out of necessitysay as the result of a job lossor out of choice, which is called strategic default as borrowers determine that there is little economic advantage to keep paying the mortgage. Longer delays in the foreclosure process further increase the incentive for a borrower to strategically default by extending the period of time that they can live rent free in the house. In addition, declining house prices increase the expected losses on those mortgages that do default.”
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