University of Arizona College of Law Professor Brent T. White has stirred quite a bit of controversy over his recent article in the Arizona Legal Studies entitled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."
His basic thesis is that despite the increasing number of homeowners walking away from their underwater mortgages, most homeowners continue to try and hold on to their homes even when it does not make economic sense to do so. He suggests that homeowners choose to try and hold on to their homes to avoid the shame and guilt of foreclosure and because of the "exaggerated anxiety" over the perceived consequences of a foreclosure created by "social control agents." In short, he believes that underwater homeowners (in Arizona and California) are not knowingly making bad choices, they just can not "cognitively grasp" that they would be better off financially by simply walking away. At the end of the day, argues White, many more underwater homeowners should be walking away from their mortgage obligations.
As a justification for his thesis, White suggests that the "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."
White argues that there are costs associated with walking away, but they are not outweighed by the financial benefits of a "strategic default." While White’s thesis is controversial, as it applies to Arizona borrowers, he is correct. Arizona’s anti-deficiency laws are incredibly broad and protect the large majority of borrowers who are now trying to keep pace with a subdivision home that is severely underwater. Arizona’s anti-deficiency statute (A.R.S. Section 33-814(G)) prevents lenders from pursuing a deficiency (the difference between the amount owed by the borrower and the price bid at a trustee’s sale) against the borrower. While a borrower’s credit rating will undoubtedly take a severe beating from a foreclosure and the borrower may have to wait several years to obtain a federally guaranteed loan, for many underwater borrowers, the calculus leads to the undeniable conclusion that walking away makes the most financial sense.
As for the moral aspect of walking away, White reasons that the overriding message to borrowers is that they have a moral responsibility to pay off their obligation. White counters this message by pointing out that lenders are operating amorally according to market norms and could have acted to protect themselves by following prudent underwriting practices. White’s final point is that "it is time to take morals out of the picture and search for an equitable solution to the negative equity problem." While White is correct in many respects, had lenders and borrowers employed a stronger sense of morals when it came to underwriting and borrowing, we might not have experienced such a severe market bubble and attendant bust.