Should you walk away from an underwater mortgage?

For those thinking of walking away from an underwater mortgage the man of the hour and most often quoted authority on the subject is Brent White of the University of Arizona Law School.

He has found that people who are walking away from home mortgages are not doing so for just financial reasons. Commercial property owners and companies default for financial reasons but not the American homeowner.

Abstract of his article:

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.

Link to the entire white paper.

Jim Van Meerten is an investor who writes about financial matters on Financial Tides and Barchart Portfolio Blogs. Please leave a comment below or email JimVanMeerten@gmail.com.

Disclosure: No positions mentioned