Behavioral Economics and Underwater Mortgages

What if peo­ple behaved like banks? Or, more pre­cise­ly, what if indi­vid­u­als hold­ing “under­wa­ter” mort­gages stopped fol­low­ing the social norms of ‘per­son­al respon­si­bil­i­ty’ and ‘promise-keep­ing’ and instead act­ed like cap­i­tal­ist play­ers in a free mar­ket? Most would dump their sink­ing mort­gages and walk away. That’s the find­ing of Brent White, a law pro­fes­sor at the Uni­ver­si­ty of Ari­zona, who has pub­lished a new paper called “Under­wa­ter and Not Walk­ing Away: Shame, Fear and the Social Man­age­ment of the Hous­ing Cri­sis.” (PDF) The bot­tom line is that home­own­ers and banks play by two dif­fer­ent sets of rules. Main Street accepts the “emo­tion­al con­straints … active­ly cul­ti­vat­ed by the gov­ern­ment, the finan­cial indus­try,” and they hold the bag. Wall Street acts in its own self inter­est and gets a fresh start. The only thing they have in com­mon these days are (you guessed it) guns.

Just for the record: I’m not advo­cat­ing a posi­tion here, and I don’t hold an under­wa­ter mort­gage…