Professor: Fear, shame keep homeowners from defaulting

Millions of American homeowners are "underwater" on their mortgages – owing more than the value of their homes – and would be better off walking away.

That is the suggestion Brent T. White, a University of Arizona associate professor of law, makes in his newly released working paper, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White, whose article will be published in this month's issue of Arizona Legal Studies, said fear, guilt and shame are what keep many homeowners from making rational economic decisions.

"These emotional constraints are deliberately cultivated by the government and lenders who self-servingly tell borrowers that they have a moral and social obligation to pay their underwater mortgages," said White of the UA's James E. Rogers College of Law.

"Meanwhile, lenders ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility," he added.

White calls this a double standard, one that has resulted in "distributional inequalities."

He argues that while irresponsible lenders have received government bailouts, responsible homeowners "who just happened to buy at the wrong time continue to bear a disproportionate burden of the housing collapse."

In his article, White cited figures finding that, in the second quarter of this year, more than 15 percent of homeowners had negative equity that was more than 20 percent of the value of their homes. Also, more than 22 percent had negative equity that amounted to at least 10 percent of the value of their homes.

This situation is exasperated in a number of states, including California, Florida, Nevada and Arizona. Cities that have reached the 60 percent threshold, including Miami Beach, Fla.; Las Vegas, Nev.; Bakersfield, Calif.; and Phoenix, Mesa and Scottsdale. Numerous cities in California also make the list, including Fresno, Madera and Yuba City.