The Real Deal Miami

Underwater homeowners not opting for strategic default

January 25, 2010 04:10PM

With so many homeowners underwater, legal professor Brent White of the University of Arizona is trying to pin down why the mortgage default rate is so comparatively low. In many cases, strategic default makes financial sense for borrowers who owe far more than their homes are worth, but most borrowers continue to make their mortgage payments anyway. White argues that their motive is “norm asymmetry,” or the perception that walking away from a mortgage would be immoral, whereas lenders’ actions in the name of maximized profit margins are justified. But homeowners in California and Arizona, for example, a couple of the states hit hardest by the foreclosure crisis, have non-recourse loans on their properties, meaning that homeowners retain the right to default on their mortgages without surrendering their other possessions. A Department of Housing and Urban Development report estimates that borrowers pay an extra $800 in closing costs for these types of loans. Most probably aren’t aware of it, but in essence, they’ve paid for the right to default, wrote Richard Thaler, an economics and behavioral science professor at the University of Chicago.