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November 30, 2009

'The moral dimensions of ditching a mortgage'

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I must say I was astounded to see the above-headlined column by Kenneth R. Harney in yesterday's Washington Post Real Estate section.

I mean, it's the nightmare of the pillars of capitalist society, whom Harney refers to as "... the 'the social control agents,' namely banks, government and the media."

Long story short: Harney focuses on "... a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

The column follows.

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The moral dimensions of ditching a mortgage

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Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don't feel guilty about it. Don't think you're doing something morally wrong.

That's the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White argues that far more of the estimated 15 million American homeowners who are underwater on their mortgages should stiff their lenders and take a hike.

Doing so, he suggests, could save some of them hundreds of thousands of dollars that they "have no reasonable prospect of recouping" in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume.

"Homeowners should be walking away in droves," according to White. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits." Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."

Better yet, you can default "strategically." Buy all the major items you'll need for the next couple of years -- a new car, even a new house -- just before you pull the plug on your current mortgage lender.

"Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles.

What kind of law school professorial advice is this? Aren't mortgages legal contracts? In an interview, White said that in anti-deficiency states such as Arizona and California, mortgage lenders have limited or no legal rights to pursue defaulting homeowners' assets beyond the house itself. In other states, lenders may decide it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.

The main point, he says, is that too often people's emotions get in the way of clear financial thinking about mortgages, turning them into what he calls "woodheads" -- "individuals who choose not to act in their own self-interest." Most owners are too worried about feelings of shame and embarrassment following a foreclosure, and ignore the powerful financial reasons for going through with it, he said.

Buttressing these emotions is a system that White labels "the social control of the housing crisis" -- pressures and messages continually sent to consumers by the "social control agents," namely banks, government and the media. The mantra these agents -- all the way up to President Obama -- pound into owners' heads, White says, is that "voluntarily defaulting on a mortgage is immoral."

Yet there is an inherent imbalance in the borrower-lender relationship that makes this morality message unfair to consumers: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20 to 50 percent in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts.

Only when homeowners cut through the emotional fog and default strategically in large numbers, White argues, will this inequitable situation be seriously addressed.

How does White's 52-page manifesto go over with mortgage lenders? Predictably, not well. Officials at Fannie Mae and Freddie Mac -- investors that fund the bulk of new mortgages in the country -- disputed White's characterization of how quickly after foreclosure a walkaway borrower can obtain a new loan. It's not three years, they said, but a minimum of five years, absent extenuating circumstances such as medical or employment problems that caused the foreclosure.

"Borrowers who walk away from their mortgage obligations face serious consequences" including severely depressed credit scores for extended periods, Fannie Mae spokesman Brian Faith said. In addition, he said, "there's a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community."

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Lewis Ranieri, chief executive of several major mortgage-related companies and one of the pioneers of the mortgage securities industry, called White's entire argument "incredibly irresponsible and misinformed." Not only is the professor urging consumers to break legally binding contracts, Ranieri said, but if large numbers of them did so it would send home mortgage rates soaring and "tear apart the very basis" upon which mortgage lending rests -- the understanding that borrowers will honor their commitments and pay back the money they borrowed.

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Here's the abstract of White's paper.

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Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

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 suggest that most homeowners choose to 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 govening 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 t distibutional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

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More?

No problema: read the paper in its entirety here by clicking on one of the buttons near the top of the page to download it.

Free, the way we like it.

November 30, 2009 at 12:01 PM | Permalink


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Comments

Alls I knows is that if we claim to be a capitalistic society, we either let businesses that fail, fail...or if we have to break our moral high ground to interfere, we help the citizens first, not the banks.

Hell, I'd have been happy with a note on my tax forms saying that since I paid my mortgage on time this year, I'm entitled to a lower tax bracket. At this point, the people that stated the problem got the benefit...not the ones that have been diligent in being good citizens and paying what they said they would...let the banks fall...

Posted by: clifyt | Dec 1, 2009 10:44:14 AM

Trust me, my position is not a matter of defending the bailout. But given the choice between bailing out the banks, or bailing out the homeowners, I'd have to side with the banks. Mainly because it's A: Easier to be lose track of what you're doing the bigger you are, and B: If you look at the laws that were intended to help the homeowner / creditee, it's either not worked (defaults are just as bad as they were before the banks were 'forced' to re-negotiate mortgages), or made things worse. Try getting a credit card with a fixed rate and no monthly fee now. It ain't going to happen (and if it does, let me know, I do have great credit, and I need something in my name alone to make sure I don't lose the good rating), because the feds tied the CCC's hands with regards to people who don't hold up their side of the deal.

So again, I get screwed over, because people charged more than they could afford, and they couldn't be bothered to read into the contract that they were signing.

Posted by: Rocketboy | Dec 1, 2009 1:05:12 AM

The problem is, a business that is backed by the gov't has an obligation to ensure that the people taking the loan can reliably pay it back.

They are the experts and KNOW if someone can pay back or not, and it is their job to make certain that undesirables don't get loans.

I took a home owners course before I bought my home...if I hadn't, a lot of the things that the banks offered me would have seemed legit...I wouldn't have done it, but that was a requirement of getting the homeowners grant I got for working for the city gov't (i.e., they wanted to encourage city employees to actually live in the community they served). The city payed my 10% down with the expectation I had to live there at least 5 years (its been 7, so I think I'm cool).

The fact is, the banks got a bailout that the average person didn't. I don't find it fair at all...it is my tax money they used. Bailing out the idiots that made bad deals. You are right, it takes two to tango, and the side that should have known better got the benefit of the doubt...and my money. I don't feel sorry for them...

Posted by: clifyt | Nov 30, 2009 8:00:43 PM

It takes two to tango. Nobody forced anyone to sign the mortgage contracts, the people who did themselves were greedy. They bought more than they could afford, hoping that values would rise forever. There was greed and bad decisions all around.

The difference is, is if the bank decides that they want all their money tomorrow, there's not a court of law that would defend that.

If someone decides that they don't feel like paying what they agreed to, well, they are protected.

Posted by: Rocketboy | Nov 30, 2009 6:05:53 PM

Honestly? I've thought of just walking away from my mortgage. My bank has received billions of my tax dollars, having given horrible loans to people that shouldn't have gotten them and screamed I SHOULDN'T BE HELD ACCOUNTABLE FOR MY ETHICALLY IMMORAL AND MOST LIKELY ILLEGAL ACTIONS...

Right now, because of the housing market, my neighborhood is a ghost town...I'm waiting for the vagrants to start moving in again like they did last winter. One was using my backyard -- that has 7 foot fences and no unlocked gates -- as an entranceway to the home to the south of me. I set up some pretty hardcore fishing like so that I could catch them sneaking in at night.

How did this happen? The banks and greed.

My bank tried and tried to get me to take an adjustable rate mortgage...offered a low low low rate that was principle only...nope...I'll take the 5.1% and leave it at that...others that weren't as smart as me? Would have gotten scammed by this...at one point the banks made money off of defaults, now they make *MONEY* off the defaults...

My home is worth more to me right now than it is in the banks hands...it is worth a hell of a lot less than I paid, but I'm still in the clear...whats going to be problematic is now that I finished my psych masters, I want to move on to med school and I don't know if I'll be able to sell it in a year (once I start applying). At that point, I'm going to decide if I stick around or not...I may just leave it for the rats...

Posted by: clifyt | Nov 30, 2009 1:28:54 PM

In summary "Make a bad decision? Screw someone else and take advantage of the situation."

Wow, just Wow.

It's not just the banking industry that should be ticked off at this guy, but everyone who DOES pay their mortgage, because in the long run, we have to pay of the defaulters.

Posted by: Rocketboy | Nov 30, 2009 12:20:59 PM

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