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Upside-Down Mortgage Loans Don’t Imprison Homeowners

House floating on a life ring
A common thought, and possible misconception, is that upside-down mortgage loans lock homeowners in place. Those living in an underwater home are believed to be stuck, unable to take new job opportunities or promotions requiring a migration since they have a weighty, negative asset that they’re unable to relieve themselves of. When skimming the surface of this argument, it’s not hard to understand why many believe it—after all, a borrower owning a home loan for more than the property is worth is in a pretty financially crippling situation. Who would feel secure in selling a home, being forced to satisfy the remainder of the mortgage loan with out-of-pocket money (assuming such funds are even available), and migrating elsewhere with fingers crossed that he or she won’t find themselves in a similar situation again?
 
Steering the Nation’s Mind
 
Since economist and New York Times columnist Thomas Friedman made the claim that “when people are so underwater, they find it hard to move to take new jobs, they find it hard to borrow or raise cash for education or start-ups, and bank become even more cautious about lending,” media sources have propelled the public’s belief that upside-down mortgage loans are imprisoning people in underwater homes.
 
Due to the lack of jobs, and the supposed inability to move up in employment, the assertion that homeowners with negative equity are tethered to their homes and doomed to be slowly snuffed out by the weight of their debt has truly taken the nation by storm. But this idea is something that was spawned from a study that was done by the National Bureau of Economics Research (NBER).
 
The NBER report took a test group consisting of more than 60,000 upside-down home loan holders across the country and studied records every two years to determine who was living in each of their houses. The report then recorded whether the individual occupants were “the same owner, a different owner, a renter, or nobody (the house is vacant.)”
 
The NBER report then dropped all renters and vacancies, and instead focused solely on the original owner and different owner statistics. When the researchers compared the amount of original owners to different owners with the value of the homes they resided in, they concluded “that underwater homeowners were almost a third less likely to move,” according to ProPublica.
 
Challenging the Status Quo
 
But some are beginning to challenge the validity of the NBER report. The challenging front runner: Economist Sam Schulhofer-Whol of the Federal Reserve Bank of Minneapolis.
 
Schulhofer-Whol didn’t believe that such a conclusion could be supported when renters and vacancies were removed from the analysis. In fact, Schulhofer-Whol revealed in a research paper titled Negative Equity Does Not Reduce Homeowners’ Mobility that the NBER report showed fewer moves among negative-equity home loan holders because the researchers systematically dropped some of their sampling’s moves from the data. Consequently, such a conclusion can only be reached when one “ignores a substantial amount of [home] movers.”
 
“I thought, let’s count as moves all the times where someone moved out and rented their house, or moved out and left it vacant, which could happen if they were foreclosed upon,” Schulhofer-Whol  economist explained to ProPublica.
 
And Schulhofer-Whol did exactly that, yielding results directly conflicting with the NBER report. He found that when renters and vacancies were included in the data that people with an upside-down home loan were actually more mobile than those with positive equity.
 
There are several explanations for this, but a primary reason, and one that’s completely disregarded when renters and vacancies are omitted from the study, is that those who default are led to foreclosure. Foreclosure inevitably leads to a homeowner’s move—thus inciting mobility.
 
“Using the same data as [NBER] but analyzing all the data rather than a subset of it, I find that homeowners with negative equity are at least as mobile as those with positive equity,” concluded Schulhofer-Whol.
 
Unfortunate Mobility is Still Mobility
 
An updated NBER report countered Schulhofer-Whol by saying their decision to not include vacancies and rentals from their report “was done by design in order to distinguish between permanent and temporary moves.” They claim that rentals and vacancies are considered temporary moves since the original owner often returns to their residence.
 
Evidence behind that assertion—that foreclosures and vacancies are someday re-inhabited by the original home loan holders—seems somewhat lacking. As a report on the impacts of foreclosure done by the Urban Institute reveals, “Residents of foreclosed properties are almost always forced to move,” and many turn to family or friends houses before pursuing a rental. Of the report’s 29 state sampling, nowhere does it mention their surveyed foreclosed residents ever return to their original property.
 
Granted the sort of mobility that results from being forced out of one’s home isn’t always the most ideal way to move away from a residence—but that sort of mobility cannot be ignored.
 
Those forced out of their homes due to foreclosure are given a new opportunity to rent at a cost cheaper than their upside-down home loan cost them. They are given a chance to find new employment offers, and move to locations of greater prosperity. Just because the cause of mobility isn’t ideal doesn’t mean that mobility is any less of a chance to move.
 
Rather, foreclosure victims who capitalize on the fact that they no longer have a negative equity home loan and adapt to new possibilities and opportunities may find themselves on the road to financial recovery.