Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis
Millions of homeowners in the United States are “underwater” on their mortgages, meaning that they owe more than their homes are worth. Yet, despite all the concern over homeowners who are simply “walking away” from their homes.
While such behavior may appear irrational on its face, 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. This includes underwater homeowners that live in “non-recourse states” such as California and Arizona, where lenders cannot pursue defaulting homeowners for a deficiency judgment.
Behavioral economists explain that underwater homeowners simply suffer from the same kind of cognitive biases that lead individuals to make other suboptimal economic decisions.
The behavioral economic explanation doesn’t account, however, for homeowners who are fully aware that it would be in their financial best interest to default, but still don’t do so. This article suggest that most underwater homeowners don’t default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure - consequences that are in actuality much less severe than most homeowners have been led to believe.
Moreover, fear, shame, and guilt are not mere “transaction costs” that homeowners calculate according to their own personal tolerance for each. Rather, these emotional constraints are actively cultivated by the government, the financial industry, and other social control agents in order to induce individual homeowners to act in ways that are against their own self interest, but which are - wrongly this article contends - argued to be socially beneficial. 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. Thus, individual homeowners tend to ignore market and legal norms under which strategic default might not only be a viable option but also the wisest financial decision. Lenders, on the other hand, have generally resisted calls to modify underwater mortgages despite the fact that 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.
Despite widespread concern that underwater homeowners are simply walking away, the vast majority of underwater homeowners have not strategically defaulted on their mortgages.
Brent T. White, Arizona Legal Studies The University of Arizona, James E. Rogers College of Law November 2009
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