I was reading this Wikipedia article about the subprime mortgage crisis, where it says the following (emphasis mine):
By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had negative equity in their homes, a number that is believed to have risen to 12 million by November 2008. By September 2010, 23% of all U.S. homes were worth less than the mortgage loan.
Borrowers in this situation have an incentive to default on their mortgages as a mortgage is typically nonrecourse debt secured against the property. Economist Stan Leibowitz argued in the Wall Street Journal that although only 12% of homes had negative equity, they comprised 47% of foreclosures during the second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay.
When foreclosures were related to the level of equity in the house, was the foreclosure started solely because of the negative equity? And if so, why? What benefit would the bank receive by foreclosing on someone who had the ability to pay their mortgage?
Alternatively, if the foreclosures were due to people who simply stopped paying the mortgage on their negative-equity home and let the mortgage default, why would they do this? I understand that negative equity would pose a significant risk if for whatever reason you needed to sell your house, but for people who aren't in that position would it not be better to continue paying the mortgage because you still have your home, and barring catastrophic damage to the property the equity will eventually correct itself? Is there some benefit to letting the home be foreclosed on that would outweigh the damage that would be done to your credit history?