Borrowers With Underwater Mortgages Show Surprising Sense of Honor

Reuters’ granularity-inclined British finance blogger Felix Salmon today highlights a wild phenomenon borne out by a recent housing survey conducted by Fannie Mae.

For instance, the survey finds that 91 percent of underwater homeowners are happy with their mortgages. Who in their right mind would be happy to owe the bank more for their house than what it’s currently worth? Also, only 6 percent of underwater borrowers think it’s okay to simply stop paying their mortgage, vs. 10 percent of the general population.

At his new NetNet blog, John Carney — who typically can offer some kind of answer to any question related to finance — doesn’t quite know what to make of this:

Wouldn’t you expect the self-interest of underwater homeowners to push them toward support for strategic defaults? And wouldn’t you expect people who aren’t in that position to be less sympathetic to walking away?

What’s going on here?

The phenomenon has been discussed before in The New York Times. One academic attributes it to the naivete of homeowners, who think that they’re simply not allowed to act in their financial interest, no matter how good defaulting on their loans would be. The Times offers some other, potentially more compelling, explanations for homeowners’ behavior, if not their attitudes, but ultimately is still confused.

Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.

One would certainly expect people to behave altruistically toward just about anyone besides the bank that is charging them more for their house than the amount it’s currently worth. One would think borrowers would see such banks as jerks who deserve to get screwed. Perhaps there is some sort of ingrained consciousness among Americans that it is a true dishonor to fail to pay your debt. Although somehow we don’t think that view is shared by everyone.

Borrowers With Underwater Mortgages Show Surprising Sense of Honor