Is the Stigma of Ditching Your Underwater Mortgage Fading?

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A good five years after the subprime mortgage crisis and housing bubble collapse, more Americans are deciding that it’s okay to just walk away. In a new survey, roughly a third of respondents said it was socially acceptable to strategically default on a mortgage. 

In a survey conducted by JZ Analytics for ID Analytics, 32% of more than 1,000 respondents said they “believe homeowners should be able to strategically default on their mortgages without any consequences.” Although the annual study hadn’t asked this question in previous years, other research about attitudes around strategic defaults indicate that this number is probably quite a bit higher than in the past. In a research paper published in 2011 titled “The Determinants of Attitudes towards Strategic Default on Mortgages,” researchers found that 82% of respondents in a series of surveys taken between 2008 and 2010 think it’s “morally wrong to engage in a strategic default.”

In 2009, Georgetown University professor of business ethics George Brenkert told the Wall Street Journal that homeowners have a moral responsibility to remain committed to their mortgage. Today, there’s obviously still a social stigma to walking away from an underwater home, given that the other two-thirds of respondents didn’t find it acceptable. In addition to shame and guilt, people also have to face a sense of loss, since most of us are emotionally attached to our homes. There are practical considerations, too: the stress of being hounded by collectors, the knowledge that you’re torching your credit, and the possibility — depending on the state — of being sued by the lender to make up the shortfall.

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There’s also community pressure to avoid foreclosure: Defaults hurt nearby property values. A 2010 study by the Cleveland Fed found “foreclosure-related sales have prices about 27 percent lower than comparable properties… each foreclosure lowered the selling price of other (nonforeclosure) properties within a radius of about 260 feet by nearly 1 percent.”

Despite all this, attitudes have clearly changed. As the subprime meltdown mushroomed and letting a home go into foreclosure became more common, the idea that only deadbeats default has been fading. The ID Analytics survey found that 17% of Americans know someone who has strategically defaulted on a mortgage.

What’s more, many people now recognize that companies are often able to declare bankruptcy and either shed or restructure their debts without long-term consequences. In a 2009 paper that explored the question of why more people don’t just hand the keys back to their lender, University of Arizona professor Brent White called the idea that companies can default but ordinary people shouldn’t “norm assymetry.” He writes:

Unlike lenders who seek to maximize profits irrespective of concerns of morality or social responsibility, individual homeowners are encouraged to behave in accordance with social and moral norms requiring that individuals keep promises and honor financial obligations.

(MORE: Is It OK to Walk Away From Your Mortgage?)

This attitude faded, however, as it became increasingly clear that lenders were complicit in the excesses that led to the mortgage crisis. “Some of the survey respondents feel homeowners should be able to strategically default on mortgages because they believe the mortgage market has been a scam for many years, built on false promises that took advantage of people,” ID Analytics says in a statement about its survey.

Indeed, noted the authors of the “Determinants of Attitudes” paper, anger at financial institutions seems to have sped this change of attitude:

“We find that people who are angrier about the current economic situation are more willing to express their willingness to default, as are people who trust banks less. Similarly, people who want to regulate executive compensations and the financial sectors are more likely to declare their willingness to walk away.

PHOTOS: The Tale of a Lost Mortgage

3 comments
underwateroption
underwateroption

I think the reason many plan a strategic default is because they feel helpless. They don't know what options they have and they don't want to wait 10-15 years for their equity to come back. My husband, Paul Aspelin, recently wrote a book called "The Underwater Social: Create Your Own Housing Bailout" that your readers might be interested. He talks about strategic defaults, credit scores and more in the book. He helps underwater home owners with a plan to get out from their underwater mortgage without defaulting, ruining their credit or walking away.

ranger99
ranger99

Business is business.  Morality doesn't enter into the equation.  You'd be a damn fool to NOT walk away if you had a mortgage that was severely underwater.  Why should you ruin your life just to artificially inflate a bank's balance-sheet?

Those same banks don't think twice about walking away from underwater properties that THEY own.  They take the hit, write-off the loss, and move on.  We should do the same.