Forget about shame and guilt. Don’t worry about your credit score. If you owe way more than your home is worth, simply stop paying the mortgage and don’t feel bad about it, suggests a University of Arizona professor.
Morality and emotions have no place in one’s decision to “strategically” default on a mortgage, says Brent T. White, a University of Arizona law professor and author of a new paper entitled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”
Keeping up with mortgage payments for a home that is not worth nearly what you owe—and in a situation in which you can’t expect to recoup your losses anytime soon—is irrational and foolish, White writes:
Underwater homeowners aren’t knowingly making bad financial decisions, they just can’t cognitively grasp that they would be better off if they walked away from their mortgages…
This article suggest that most underwater homeowners don’t default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure — consequences that are in actuality much less severe than most homeowners have been led to believe.
If you default, indeed your credit score takes a big hit right away. But, according to a story about White by syndicated columnist Kenneth Harney, it’s possible to have a decent credit score again roughly two years after defaulting on a mortgage:
Better yet, you can default “strategically”: buy all the major items you’ll need for the next couple of years – a new car, even a new house – just before you pull the plug on your current mortgage lender.
“Most individuals should be able to plan in advance for a few years of limited credit,” says White, with minimal disruptions to their lifestyles.
This seems entirely unethical, but apparently it’s not illegal, and in a cold, strictly business sense, it makes, well, sense. Ethics didn’t enter bank’s decision to give you a mortgage, and ethics should not enter your decision to stop paying the mortgage, or your decision to stop paying the mortgage at the most opportune moment.
From Harney’s story:
White said that in so-called anti-deficiency states such as Arizona and California, mortgage lenders have limited or no legal rights to pursue defaulting homeowners’ assets beyond the house itself. In other states, lenders may decide it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.
The main point, he says, is that too often people’s “emotions” get in the way of clear financial thinking about mortgages, turning them into what he calls “woodheads” – “individuals who choose not to act in their own self-interest.” Most owners are too worried about feelings of shame and embarrassment following a foreclosure, and ignore the powerful financial reasons for doing so.
One psychologist who helps patients deal with debt and money problems also advises people to forget about the shame and guilt of credit card debt—but for different reasons. Psychologist Brad Klontz is quoted in a Chicago Tribune story:
“Guilt is good for us because it inspires us to repair things,” but it can also interfere, he said in an interview. “We can go into denial or avoidance and get stuck in a shame cycle.”
When they look at credit card bills, Klontz said, people in shame might conclude: “There’s something wrong with me.” And “when people decide they are broken, they think: ‘Why try to fix anything?’ They might give up.”
Giving up, then, would be bad. Unless, of course, giving up on a debt, i.e. walking away from your mortgage, is the soundest financial decision you can make. Professor White would suggest it is OK—smart even—to give up strategically, when doing so is in your self-interest.
All these damn emotions get in the way of making good decisions, now don’t they? When you take on your next big financial conundrum, I guess the idea is that you should try to channel your inner robot.