Okay, FSBO’s, I know I’ve kind of been slacking on the remainder of the FSBO process blog, but I can assure that will be up later this week. Let’s keep digging into the mystery that is the current real estate market.
Brent White, a University of Arizona law professor, has released a paper entitled, “Underwater and Not Walking Away: Shame, Fear, and the Social Management of the Housing Crisis”. Here is a link to the abstract. I highly suggest that you download and read because Mr. White has presented a highly unorthodox point of view to this whole housing market crash. Don’t be alarmed at the number of pages—most of it is annotations and citations.
In his this paper he examines the position of homeowners “under water”. This refers to any homeowner who is currently paying a mortgage on a home that is worth less than the mortgage itself (pretty much any homeowner who purchased in the last five years). He, in fact, condones the decision to default, or “walk away” from the mortgage payment, much to the dismay of federal regulators, real estate professionals, and bank lenders.
I’ll give you the short of it: Let’s say you bought a home for $330,000 in 2004 and are paying a 30-yr fixed-rate mortgage on it. After the collapse in 2008, your home’s value dropped drastically to $185,000, while you’re still paying the same mortgage for a home that is half the value. Mr. White cites that despite obvious dings to your credit score, it is in your financial best interest to simply walk away from the mortgage and foreclose. Sounds crazy, right? Why would anyone intentionally destroy their credit? Well, according to Mr. White, the thousands of dollars you might have to fork up in lieu of your bad credit and other taxes accrued because of default will be considerably less than trying to recover your home’s original value after years of inflated mortgage payments.
In the essay, Mr. White supports his claims with countless statistics and surveys. Despite the fact that many say they would walk away from their “under water” property, “strategic defaults” are accounting for somewhere near a quarter of foreclosures. So, despite all the financial sense it might make for a homeowner to foreclose, they simply aren’t doing it. Mr. White concluded that people really only walk away when they absolutely have to. He refers to this as the “Moral Constraint” imposed by the housing market and the system of government behind it. As long as people can afford their mortgage, the majority of homeowners are willing to pay it, even though the house’s value has greatly decreased. The government is also counting on that being the trend. With programs such as “Hope for Homeowners” aid is given to new homeowners in mortgage trouble and keeps them making payments.
This “moral constraint” brings into the focus a strong theme running through Mr. White’s paper, one of sociology and behavioral psychology. People, despite what many think, don’t often act rationally. We tend to make decisions more based on emotions. And emotions, according to Mr. White, are keeping people from “walking away” (hence the ‘shame’ and ‘guilt’ after the colon in the title). People are afraid to default out of shame and guilt? But they could save thousands, maybe even hundreds of thousands by walking away. Why wouldn’t a person do the smart financial thing and foreclose?
According to Mr. White: “The predominate message of political, social, and economic institutions in the United States has functioned to cultivate fear, shame, and guilt on those who might contemplate foreclosure.”
Pretty heavy stuff. A little too Big Brother-esque if you ask me, but he does make a good point. In any political situation, there is a fair amount of bureaucracy to go through. And as a tax-paying citizen, we are often forced through the gauntlet. It presents the question of why would a person feel obliged to pay an under water mortgage to a bank that used unethical practices to sell the mortgage in the first place, thus contributing to the mortgage payer’s current state of shoddy affairs? To make matters worse, these banks were bailed out by the government via taxpayer money. So what social obligation is preventing the homeowner from foreclosing on property? The banks failed to hold up their end of the bargain, so why do we feel so obliged to hold up our end?
Now, don’t get me wrong. I’m not endorsing the idea of walking away from your mortgage. If we all did that, the housing market would implode. I just think that Mr. White has made a great point—not only a feasible look into different ways to work within the real estate market but also a very interesting social commentary on people’s economic behavior. It really gets you thinking…
I highly suggest you check out this little essay and see what you think yourself. If anyone would care to comment, by all means, I would love to discuss.
Tags: "Underwater and Not Walking Away: Shame, and the Social Management of the Housing Crisis", Brent White, Fear, Foreclosure, Underwater
