Take This House and Shove It: The Emotional Drivers of Strategic Default

51 Pages Posted: 10 May 2010 Last revised: 15 May 2010

Brent T. White

University of Arizona - James E. Rogers College of Law

Date Written: May 14, 2010

Abstract

An increasingly influential view is that strategic defaulters make a rational choice to default because they have substantial negative equity. This article, which is based upon the personal accounts of over 350 individuals, argues that this depiction of strategic defaulters as rational actors is woefully incomplete. Negative equity alone does not drive many strategic defaulters’ decisions to intentionally stop paying their mortgages. Rather, their decisions to default are driven primarily by emotion – typically anxiety and hopelessness about their financial futures and anger at their lenders’ and the government’s unwillingness to help. If the government and the mortgage industry wish to stem the tide of strategic default, they must address these emotions.

Because emotions are primary, however, principal reductions may not be necessary. Rather, many underwater homeowners simply need some reason to feel less apprehensive about the financial consequences of continuing to pay their underwater mortgages. One possible way to provide this comfort would be a “rent-based loan program,” allowing underwater homeowners to refinance their entire balances to an interest rate that would bring their mortgage payment in line with the rental cost of a comparable home. Indeed, a rent-based approach would relieve many underwater homeowners’ financial anxiety and likely be enough alone to stem the tide of strategic default.

Keywords: mortgage, strategic default, emotion, housing, contracts, ethics, foreclosure, fear, guilt, shame, norms

JEL Classification: K11, K12, K2

Suggested Citation

White, Brent T., Take This House and Shove It: The Emotional Drivers of Strategic Default (May 14, 2010). Arizona Legal Studies Discussion Paper No. 10-17. Available at SSRN: https://ssrn.com/abstract=1603605 or http://dx.doi.org/10.2139/ssrn.1603605

Brent T. White (Contact Author)

University of Arizona - James E. Rogers College of Law ( email )

P.O. Box 210176
Tucson, AZ 85721-0176
United States

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