Could attending to homeowners' emotional needs be the answer to the problem of strategic foreclosures? If we're to believe a new paper from University of Arizona law professor Brent White, that may be exactly what's needed.
White made waves earlier this year by publishing a paper arguing against the moral judgments made about strategic defaulters, those who could afford to keep making payments, but walk away for other reasons. While a great many Americans still believe that paying your mortgage is an unassailable obligation, White contended that defaulting boils down to a business decision, and one that may make sense for deeply underwater homeowners.
In his new paper -- "Take this House and Shove it: The Emotional Drivers of Strategic Default" -- White tackles the emotional aspect of strategic default.
I'm defaulting, damn it!
The argument that most strategic default proponents -- including White -- have used is that walking away from your home can make good economic sense. A great many homeowners in the hardest hit markets are underwater by hundreds of thousands of dollars and -- outside of another irrational housing market bubble -- have little hope of recovering for a long, long time. In some cases, these homeowners would be much better off defaulting and renting instead.
But as White outlines in his most recent paper, it appears that precious few strategic defaulters may actually be driven by clearheaded, sober calculations. Based on personal accounts from more than 350 self-reported strategic defaulters, White has concluded that the emotional aspect of the homeowners' financial situations plays a larger role than business math.
Of the myriad emotions that White explores, it appears that anger finally pushes most strategic defaulters over the edge. This anger seems to come in two primary flavors, the first of which is anger at the banks.
After receiving billions in TARP money, major mortgage lenders like Citigroup
The other primary anger flare-up among homeowners stems from the perceived injustice of Hope for Homeowners and other government-sponsored housing assistance programs. Some underwater homeowners -- many of whom had top credit scores and made substantial down payments -- view the government's programs as primarily targeted at those who were irresponsible in the first place, buying more house than they could afford or taking out massive equity loans against their home.
Creating cooler heads
The issue of strategic defaults is interesting because it's so contentious; it's also very important from a recovery perspective. The big mortgage lenders mentioned above are still trying to regain their footing, while major homebuilders like Toll Brothers
But White suggests that by recognizing the key role that emotions play in the strategic default process, both banks and the government can revise their policies to better stem the tide by better addressing the emotional component.
One suggestion is for both bank and government programs to be more aggressive in dealing with struggling homeowners early. This could keep anxious feelings from building to the point where homeowners make the decision to stop paying. This is key, because White notes that "once individuals actually make the psychological break to strategically default on their mortgage, there is little chance that they will self-cure."
Getting more specific, he outlines a plan he refers to as a "rent-based loan program," which would basically allow underwater homeowners to refinance to an interest rate that would drop their monthly payments to that of a comparable rental. He suggests that this may relieve underwater homeowners' concern that they are committing financial suicide by continuing to pay, while not requiring big principal reductions by the banks.
Regardless of whether White's findings end up influencing policies at banks or in government programs, strategic default will undoubtedly continue to be a highly polarizing issue.
So now I want to know what you think. Scroll down to the comments section and share your thoughts on strategic defaults and whether we need new policy thinking on the issue.
No doubt many of you think strategic defaulters are dumb. But are they dumber than day traders?
