By Sara Huebener
I just read a lengthy white paper by Brent T. White of the University of Arizona titled Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis. The paper contends that social norms, not financial sense, are the leading reasons that homeowners who should walk away from their homes are not, and will not, do so. And that the large question is not why large numbers of people are walking away from their homes....it's why larger numbers are NOT.
While he posed some interesting food for thought for possible solutions to the housing crisis at the end of the article, I found myself angered while reading significant portions of it. I would be interested to know what others think on this white paper. Perhaps my conservative small town country girl values stood in the way? What do you think?
He contends (in a nutshell) that the values homeowners have already lost will take so many years to recoup that people would be far better off walking away from their homes in droves, qualifying to buy another home via FHA within as little as three years, and ignoring the short-term ramifications of damaged credit. This stance is directed primarily at those with GOOD credit who have been paying their mortgages ON TIME but are still significantly underwater.
He states that homeowners as a class (and this is probably true to some extent) are risk-averse and value the security of good credit. He also said that homeowners tend toward overly optimistic levels of confidence....believing that home values will bounce back in a few years. (Also probably true to some degree, as we hear this from prospective sellers often.) But he states that when homeowners are not receptive to the idea that their home is worth thousands less than they paid for it, it will be futile to convince them that a couple years of bad credit is "no big deal".
The article justifies an "Every Man for Himself" approach, and states that since banks have been bailed out and are still failing to modify loans for individuals, individuals should conclude that they should forget about morals and look out for their own self-interests. Keep in mind, this is aimed at the mortgage-paying homeowner with good credit. In my opinion, this is short-sighted. Furthermore, this attitude breeds the belief that when things don't go our way, it is perfectly okay to walk away from it. Regardless of contractual obligations.
He discusses FEAR and SHAME and how they pertain to homeowners making bad financial decisions, with poor credit and foreclosure being the financial suicide to be avoided at all costs, and the impression that a homeowner who can pay but chooses walks away as being nothing more than a speculator - i.e. the most "despicable" members of society.
He offers a number of justifications for his beliefs, the first being one strictly of numbers and doing the math and calculating the number of years it would take to recoup lost equity, comparing it against the short-term effect of bad credit for a few years and being able to offer significant savings in a home purchase in a few short years.
He also states that since lenders do not behave according to the same social and moral norms that we do, with lenders essentially being the "wolf" and the homeowner being the "sheep" (I use the Commerce Department's analogy here...), homeowners are justified in walking, and/or lenders should share in the responsibility for using collateralized loans that were in far excess of the intrinsic value of the home (interesting point).
Solutions he recommends include preventing lenders from reporting mortgage defaults to credit rating agencies, thereby eliminating lender's ability to hold borrower's human worth as collateral and sending the signal that a borrower who exercises his contractual right to default should not be viewed as immoral. I don't get this.....this is a DEBT.
He suggests that perhaps the borrower and lender share in the loss....a homeowner might agree to absorb all the loss for a reduction in the interest rate...or a sharing agreement between homeowner and lender in all future equity if the lender will agree to a principal reduction now. (Hmm, this is an out of the box thought that is interesting to consider.)
I could go on all day about this......but in the interest of time, I won't. Obviously if everyone walked away in droves as he suggests they should, our market would collapse. But he does pose some food for thought in the solution department. What do YOU think??
http://cdhrealestategroup.typepad.com/west_savage/2010/04/underwater-and-not-walking-away.html
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