Homeowners should be walking away from underwater houses in droves, according to the analysis of University of Arizona law professor Brent White. And they shouldn’t feel guilty about it either.
White’s argument is that until borrowers make clear headed economic, rather than emotional, decisions about paying for underwater houses, the banks will not be moved to modify mortgages. And of course, the statistics that are coming out about the number of mortgages actually, permanently modified are laughable: something like 1700 mortgages modified in a country where 8% of mortgages are delinquent.
So, is a contract to repay money a moral commitment, or is it a promise made with economic consequences for breaking it? Look at the example of professional sports coaches: coach has a five year contract, team doesn’t perform, and owner fires coach after two years. Coach has a right to damages for the remaining three years of the contract.
Does anyone think the team owner has done something immoral? Rather, he has chosen to pay the price of breaking a legally enforceable promise to pay the coach for five years.
It is the scale of the impact that adoption of White’s view of home loans that has provoked a stern, finger wagging response from lenders and Fannie Mae. White terms the campaign by banks, government and media to brand voluntary default as immoral as “social control”.
White’s 50+ page paper is available online.