Verlin Vink and The Vink Team

Whether a homeowners ’s decision to allow his or her lender to foreclose is based on a presently existing financial hardship, anticipated financial strain over time, or to strategically divest themselves of a bad investment, the debate rages as to whether such a decision on the part of the borrower is morally wrong or financially sound.

It is important to examine this issue from an objective standpoint, weighing well-informed arguments from both sides of the debate. An excellent commentary on ‘strategic walkaways’ by Mike Bell and the ensuing robust debate on this topic can be found here:  The Ethical Dilemma of Strategic Walk-Aways.

For another view, see Arizona Republic reporter Russ Wiles’ story in the February 14, 2010, called “Walking away’ comes with drawbacks.”  The story says,

But the prospect of mass “strategic defaults,” where homeowners who can afford their payments nevertheless walk away, has sparked sharp words from both sides.  That’s partly because these actions don’t just affect borrowers and their lenders, but other parties, too.

Update:  See an MSN Money article called “Are you foolish to pay your mortgage?” and “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” by Professor Brent T. White, University of Arizona College of Law.  The abstract for this article states:

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.  Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision.  Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.  This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

By Jeana Morrissey, on February 12th, 2010