Monday, January 4, 2010

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

What follows is a study published by the University of Arizona’s College of Law. While I have not waded into the moral arguments too deeply surrounding the housing crisis, I am one who approaches this issue with the same impersonal business thinking of a bank or any business. I would do what’s best for me. Of course, I saw this crisis coming and sold ALL my real estate, rental properties and residence. Being proactive is always best, but if you are underwater then you must evaluate and make the best decision for you. Please consult an attorney BEFORE taking any action.

My perspective is that in the contest of the chicken and the egg, the banks were the chicken that laid the crisis’s egg. They and other social pressures lead people in our society to believe that somehow it’s immoral for you to make a business decision, even though it was their unethical practices that caused your home to become unaffordable in the first place. Our entire banking system is now corrupt beyond belief, the banks latest gimmick is front running the new credit law and jacking to usurious levels the interest on credit cards.

This entire report is interesting, the following paragraphs is just a sample (ht RRH):
A concern repeatedly voiced by policy makers, economists, and the media is that the “social pressure not to default will weaken” to the point homeowners will begin to walk in droves. Of particular concern is the contagion effect, the notion that once a few people in a neighborhood walk, others will follow, until whole neighborhoods end up as empty wastelands. Indeed, geographical patterns already show that foreclosures cluster in neighborhoods, suggesting that once foreclosure is seen as acceptable within a given community, and an individual knows others who have survived foreclosure, there may be less reason to feel ashamed of one’s decision to walk or to fear the consequences.

Alarmed by the possibility that foreclosures may reach a tipping point, formal federal policy has aimed to stem the tide of foreclosures through programs designed to “reduce household cash flow problems,” such as the Making Home Affordable (MHA) loan modification program and Hope For Homeowners. Implicit in this approach is the assumption that home owners are unlikely to default on their mortgage if they can “afford” the monthly payment. In other words, federal policy assumes that homeowners are – for the most part - not “ruthless” and won’t walk away from their mortgages simply because they have negative equity. Most homeowners walk only when they can no longer afford to stay. As evidence of this fact, only 45% of homeowners would walk even if they had $300,000 in negative equity. This percentage drops to 38% among the subset of individuals who believe it is immoral to strategically default on one’s mortgage (a subset to which 87% of homeowners belong).

These numbers suggest that the “moral constraint” is a powerful one indeed – and that, for most people, only the complete inability to afford their mortgage would push them to default. On the other hand, the fact that 63% of “amoral” individuals would default at $300,000 in negative equity, and 59% would do so at $200,000, suggests that federal policy can only proceed on the premise that affordability is the prime consideration as long as the moral and social constraints on foreclosure remain strong. The government thus has an incentive, along with certain other economic and social institutions interested in limiting the number of foreclosures, in cultivating guilt and shame in those who would contemplate walking away. Similarly, knowing that guilt and shame alone are not enough to prevent many individuals from defaulting once negative equity is extreme, these same institutions have an interest in increasing the perceived cost of foreclosure by cultivating fear of financial disaster for those who contemplate it.

But, to be sure, the predominate message of political, social, and economic institutions in the United States has functioned to cultivate fear, shame, and guilt in those who might contemplate foreclosure. These emotions in turn function as a form of internalized social control – encouraging conformity to the norm of meeting one’s mortgage obligations as long as one can afford to do so.

The clear message to American homeowners from nearly all fronts is that one has a moral responsibility to pay one’s mortgage. The message is conveyed not only by political, social, and economic institutions, but by the majority of Americans who believe that voluntarily defaulting on a mortgage is immoral. At the political level, government spokespersons, including President Obama, have repeatedly emphasized the virtue of homeowners who have acted “responsibly” in “making their payments each month”116 and have lamented the erosion of “our common values” by, for example, those who irresponsibly borrowed beyond their means.117 The worst criticism has been reserved, however, for those who would walk away from mortgages that they can afford. Typical of such criticism is that of Secretary of the Treasury Henry Paulson, who declared in a televised speech: “And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.”

Underwater and Not Walking Away