54 Pages Posted: 27 Oct 2009 Last revised: 9 May 2015
Date Written: October 27, 2010
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.
Keywords: mortgage, housing, law and economics, emotion, foreclosure, fear, guilt, shame, norms, principal
JEL Classification: K2, D1, D11, D81, H5, R31
Suggested Citation: Suggested Citation
White, Brent T., Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis (October 27, 2010). Wake Forest Law Review, Vol. 45, p. 971, 2010; Arizona Legal Studies Discussion Paper No 09-35. Available at SSRN: https://ssrn.com/abstract=1494467 or http://dx.doi.org/10.2139/ssrn.1494467