Real Estate

A look at the 'Underwater and Not Walking Away' study

Highlights from "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis," by Brent White, associate professor of law at the University of Arizona.

"Millions of U.S. homeowners are 'underwater' on their mortgages, meaning that they owe more than their homes are worth."

"The vast majority of underwater homeowners continue to make their mortgage payments, even when they are hundreds of thousands of dollars underwater and have no reasonable prospect of recouping their losses."

Fear, shame and guilt are "actively cultivated by the government, the financial industry and other social control agents" to induce homeowners to act against their own self-interest.

"Unlike lenders who seek to maximize profits irrespective of concerns of morality or social responsibility, individual homeowners are encouraged to behave in accordance with social and moral norms requiring that individuals keep promises and honor financial obligations."

Homeowners ignore market and legal norms that might make strategic default the wisest financial decision.

Lenders "have generally resisted calls to modify underwater mortgages despite the fact it would be both socially beneficial and morally responsible for them to do so."

"This norm asymmetry has lead to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse."

"The financial costs of foreclosure, while not insignificant, are minimal compared to the financial benefit of strategic default -- particularly for seriously underwater homeowners."

Lenders know "people are less likely to default if doing so will make them feel like immoral or irresponsible persons." Guilt and shame are powerful motivators in homeowner decisions not to default, and lenders use that to their advantage.

"The clear message to American homeowners from nearly all fronts is that one has a moral responsibility to pay one's mortgage. The message is conveyed not only by political, social, and economic institutions, but by the majority of Americans who believe voluntarily defaulting on a mortgage is immoral."

Those who voluntarily default "are portrayed as obscene, offensive and unethical, and likened to deadbeat dads who walk out on their children, or those who would have 'given up' and just handed over Europe to the Nazis."

The "huge financial upside to strategic default for seriously underwater homeowners ... is routinely ignored by the media, credit counseling agencies, and other political and economic institutions (when) 'informing' homeowners about the consequences of default."

Those who default "face no risk of a deficiency judgment in many states or ... for FHA loans or loans held by Fannie Mae or Freddie Mac."

"There is no tax liability on forgiven portions of home mortgages under current federal tax law ... until 2012."

"There is a clear imbalance in placing personal responsibility on the borrower to honor their 'promise to pay' in order to relieve the lender of their agreement to take back the home in lieu of payment. Given lenders' generally superior knowledge and understanding of both mortgage instruments and valuation of real estate, it seems only fair to hold them to ... their bargain."

"The value of personal responsibility would require lenders to own up to their share of the blame, and work with underwater homeowners by voluntarily writing off some of the negative equity."

— J.N. Sbranti