Why Some Homeowners Continue Paying on Underwater Mortgages

The repercussions of the 2007-2010 sub-prime mortgage crisis and the fraud associated with it still affect many Americans today. During this challenging period, numerous homeowners lost their jobs, resulting in foreclosure as they struggled to meet their mortgage payments. Others faced financial hardship when their adjustable-rate mortgages caused their monthly payments to rise. Despite these setbacks, some homeowners managed to continue making payments on homes with underwater mortgages.

Why Homeowners Stick with Their Underwater Mortgages

An underwater mortgage occurs when the amount owed on a home loan exceeds the home's current market value. In this situation, a homeowner might be able to sell the house at full market value but still owe thousands of dollars to the lender. Some homeowners choose to "walk away" from the property and allow the lender to foreclose. However, others opt to stay, even though their home’s value is lower than the mortgage balance. This second group is particularly interesting to economists and housing experts.

A recent study by the New York Fed Survey of Consumer Expectations explored the reasons people continue to pay their mortgages on homes that are underwater. The central question in the survey was, "Why didn't you stop making payments on your underwater home?"

Around 11% of participants believed home prices would eventually recover, and their property's value would surpass the mortgage amount. For many who held onto their homes over the past 8 to 10 years, this strategy has paid off, as home values have increased in many areas of the country.

Additionally, 15.5% of respondents felt it would be morally wrong to stop paying and "walk away" from the home. About 19% were concerned that ceasing payments would hurt their credit scores, which is a valid concern. Another 25% said the cost of moving to a new home was too high.

The main reason most homeowners stuck with their underwater mortgages was simpler: 77.6% of respondents said they liked their homes and did not want to lose them.

Note: The survey percentages may add up to more than 100% because some respondents provided multiple reasons for staying in their underwater homes.