The unresolved mortgage bubble
Recent data on the increasing number of homeowners going underwater on their mortgages points out that the total of outstanding mortgage balances is in a bubble with respect to home values. Banks are looking to resolve this bubble by waiting for mortgage repayment and for house prices to rise. This has been called “extend and pretend”. Some homeowners, on the other hand, are looking to resolve their bubble by strategic default. This refers to the mortgagor walking away from a property rather than continue payments even though they have the cash flow capable of continuing the mortgage payments. This action diminishes the chances of success for the bank strategy.