Brent White Paper on Underwater Mortgages

Brent T. White of the University of Arizona - James E. Rogers College of Law has written Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.  With more than 12,000 downloads, it's the most downloaded paper to appear in the SSRN LSN Consumer Law Abstracts ejournal thus far.  Here's the abstract:

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

Comments

[Jeff Sovern]

Thanks, Brian. I also think the fact that many borrowers are underwater but still paying their mortgages undermines claims that the subprime crisis was caused solely by a decline in housing prices and not by a failure of consumer protection because it indicates that something other than a decline in home prices is needed before borrowers default--such as an affordable loan that should never have been made and that the borrower did not understand the terms of.

[Brian]

Jeff:
This is interesting -- and not terribly surprising. Its findings are consistent with the norms associated about consumer-business transactions generally. When a business defaults on a contract -- say, a pre-paid one-year subscription for a product or service -- because it has gone out of business, generally people don't think of the business as having done something morally wrong. But if the consumer defaults after receiving a product or service, it is often considered morally questionable (or worse), even if the reason is understandable (such as loss of a job).
Brian