Social Control of the Housing Crisis vs. Strategic Default

Published: November 30, 2009

Brent T. White, an Associate Law Professor at the University of Arizona, has published a 50+ page paper on why he believes homeowners who are upside down in their mortgages should just walk away. It’s an interesting piece and, while I don’t agree with some of his hypothesis and conclusions, he does have some valid points.

You can read the whole paper here and I would love to hear your comments. I know we are seeing more ‘strategic defaults’ in our area and there are those that are voicing concern that a new wave of these may derail the fragile recovery we are seeing.

Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

White essentially boils the argument down to a ‘logic vs emotion’ basis and posits that the reason people aren’t taking the smart alternative and walking away in droves is because we are being socially conditioned or worse – socially controlled – to stay in our homes even when it makes no sense. A vast government/lender/media conspiracy is convincing us it’s not the right thing to do morally or ethically and we should just continue to suck it up and pay off our underwater loans.

According to White, our emotions are being played like a fine fiddle by what he calls “the social control of the housing crisis” — pressures and messages continually sent to consumers by the “social control agents,” namely banks, government and the media. The mantra that these agents — all the way up to President Obama — pound into owners’ heads is that “voluntarily defaulting on a mortgage is immoral.”

White says: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts. Only when homeowners cut through the emotional fog and default strategically in large numbers will this inequitable situation be seriously addressed.

How does White’s 54 page manifesto go over with mortgage lenders? Predictably, not well. Officials at Fannie Mae and Freddie Mac – investors who fund the bulk of all new mortgages in the country – disputed White’s characterization of how quickly after foreclosure a walkaway borrower can obtain a new loan. It’s a minimum of five years, not three, absent extenuating circumstances such as medical or employment problems that caused the foreclosure. “Borrowers who walk away from their mortgage obligations face serious consequences,” including severely depressed credit scores for extended periods, said Brian Faith of Fannie Mae. In addition, he said, “there’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”

I know we advise homeowners to try loan mod 1st, short sale if that doesn’t work and foreclosure as a last resort if all else fails. Are we doing our clients a disservice? According to White, who obviously dwells in the halls of academia and not so much the real world, we are. What do you think

Last modified: November 30, 2009 at 9:39 am | Originally published: November 30, 2009 at 9:39 am
Printed: September 24, 2020