Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis
Brent T. White
University of Arizona - James E. Rogers College of Law
October 27, 2010
Wake Forest Law Review, Vol. 45, p. 971, 2010
Arizona Legal Studies Discussion Paper No 09-35
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.
Number of Pages in PDF File: 54
Keywords: mortgage, housing, law and economics, emotion, foreclosure, fear, guilt, shame, norms, principal
JEL Classification: K2, D1, D11, D81, H5, R31
Date posted: October 27, 2009 ; Last revised: October 29, 2010
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