Modifications,Short Sales,Deeds in Lieu,WriteDowns

Strategic Defaults; Some Thoughts on Brent White's Paper

Posted on Monday, January 25, 2010

Arizona Assistant Law Prof. Brent White has observed that many borrowers are not walking away and attributes that to several factors;

Result of two behavioral economic emotional forces; (a) desire to avoid shame and guilt and (b) exaggerated anxiety over perceived consequences (c) actively cultivated by government (d) in sharp contrast to government and financial leaders who seek to maximize profits/minimize losses irrespective of morality or social responsibility. Leads to inequalities in which homeowners shoulder more of the housing collapse burden.

OK. So the desire to avoid shame and guilt is what motivates most of you to do most of the things you do every day. Especially if you're Jewish like me. But for shame and guilt you could pretty much throw the 10 Commandments into the Red Sea, right? Ditto anxiety over perceived consequences. Isn't that why you did your homework when you were a kid and ditto beat up your sister (when you knew there was a witness to tip the scales of your word against her's)? The reason you get out of that warm snuggly bed every morning to deal with a pain in the butt boss (or secretary, depending on where you are on the corporate food chain). That government and financial leaders seek to maximize profits/minimize losses irrespective of morality or social responsibility should likewise come as no surprise to anyone who's read the paper since the bubble crashed. The fine line between obligations to shareholders (or their equivalents) and good old fashioned ethics has been in flux since the dawn of man kind. And thank god. But for this push and pull there'd be an aweful lot of unemployed regulators!

The argument that, as a result, homeowners are shouldering most of the housing burden is an interesting one. And White's paper is tremendoulsy appreciated as an interesting, somewhat persuasive argument. Much of the psychology is insightful. Though the overall picture is of little practical use to anyone outside of the dozen or so U.S. states that are nonrecourse (or considering becoming non-recourse to any extent).

White notes that most borrowers do not do actual math analysis, don’t realize banks don’t pursue deficiencies, believe foreclosure process is aggressive/they will be bullied, believe if they do bad things, bad things will happen to them, and tend to be overly optimistic. He sights the now well-known Guiso, Spaienza, Zingales study: 81% believe immoral to default. Foreclosures cluster in areas. All of which actually do help to restore faith in borrowers' humanity.

But at the end of the day, I still can't condone even an ounce of the victem mentality. Of course banks have more leverage every step of the way than borrowers (unless of course you want to talk with your pocket and chose a bank that does you good). My guess is Ben And Jerry are holding out on how bad eating their ice cream is for my health, but I can't blame them when my size 6 (ok 8) starts feeling snug. Interpreting complicated chemical ingredients, no less reading that fine print, is challanging and requires doing your homework. But Im the only one accountable for the outcomes of my love affair with Cherry Garcia if I choose not to. The point is...what ever happened to personal accountability. No one in this whole entire universe, no less, Washington, is in a better positon to protect you from the so called "bad guys" than you.

Whinning over lack of equal leverage only gives those disposed to cry victem (and I'm not speaking about the many folks who know they made a mistake with their loan but are now truely victems of banks and servicersw who can't get their act together) one more excuse.


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