Less Stigma, More Ditched Mortgages?

Social Stigma vs. Financial Self-Interest

Across U.S., Food Stamp Use Soars and Stigma Fades

--Headline, The New York Times (11/28/09)

[A new academic paper] argues that far more of the estimated 15 million American homeowners who are underwater on their mortgages should stiff their lenders and take a hike.

--Kenneth Harney, "The Moral Dimensions of Ditching a Mortgage"; The Washington Post (11/28/09)

During the Vietnam War, civil disobedience consisted of burning your draft card.

In Colonial New England, civil disobedience took the form of throwing highly taxed tea into Boston harbor.

Might civil disobedience, circa 2010, manifest as homeowners ditching their underwater mortgages, even though they still have the means -- at least for now -- to pay them?

Moral "Double Standard"

Called "strategic default," the practice is the subject of a new academic paper by Brent White, a Professor at the University of Arizona Law School. White argues that strategic default is a rational response for millions of beleaguered homeowners:

"Homeowners should be walking away in droves," according to White. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits. Most owners are too worried about feelings of shame and embarrassment following a foreclosure, and ignore the powerful financial reasons for going through with it," he said.

--Brent White, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis"

According to White, would-be defaulters can organize their financial affairs to minimize the disruptions caused by the inevitable damage to their creditworthiness. That includes making major purchases prior to defaulting.

Aside from the morally repugnant nature of Wall Street executives paying themselves billions barely a year after their recklessness jeopardized the financial system, their behavior risks an even greater harm: it allows millions of Americans to rationalize their own bad behavior.

"The system screwed us," they might logically conclude. "Why shouldn't we screw it?"