A study at the Boston Fed reports some good -- and common-sense -- news. Most people with negative equity in their houses don't walk away from the mortgage. Negative equity is when your mortgage is bigger than the value of your house -- not an uncommon situation in these days of declining house prices. But in a study of Massachusetts homeowners, the researchers found that most people in negative equity situations continue to pay their notes.

Only when there is negative equity and a cash flow problem do people default. This offers a dose of optimism in response to those who fear that widespread negative equity will necessarily cause more defaulted loans. Basically, the researchers argue that the sizable costs of defaulting on your mortgage -- credit damage, moving expenses etc. -- outweigh any hit from negative equity and induce rational homeowners to stay put. HT Calculated Risk.

Millions of Americans have negative housing equity, meaning that the outstanding balance on their mortgage exceeds their home’s current market value. Our data show that the overwhelming majority of these households will not lose their homes. Our finding is consistent with historical evidence: we examine more than 100,000 homeowners in Massachusetts who had negative equity during the early 1990s and find that fewer than 10 percent of these owners eventually lost their home to foreclosure. This result is also, contrary to popular belief, completely consistent with economic theory, which predicts that from the borrower’s perspective, negative equity is a necessary but not a sufficient condition for foreclosure. Our findings imply that lenders and policymakers face a serious information problem in trying to help borrowers with negative equity, because it is difficult to determine which borrowers actually require help in order to prevent the loss of their homes to foreclosure.