Monday, November 09, 2009

why more people don't "walk away" from their mortgages

Sacbee | A fellow business writer here at the paper received this report today from a University of Arizona associate law professor he's interviewed in the past. It a full-scale look at why people stay in their homes even when they are way underwater - when the sensible business decision might be to walk away.

I haven't yet read most of it. But I think it's very relevant here in Sacramento.

The 54-page study by Professor Brent T. White, titled, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis" is at this link.

Here is the summary:

"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."