Most of the 17,500 Stanislaus County homeowners whose houses have been foreclosed upon since 2006 didn't have a choice. They couldn't afford their mortgage payments, so lenders forced them out.
But a growing number of those defaulting on mortgages have enough money to keep paying; they just choose to walk away from the debt. That's called a "strategic default," and it may be a mathematically logical choice for thousands of families who owe far more on their mortgages than their homes are worth.
So why don't more homeowners do it?
That's what law Professor Brent White explores in his provocative new academic paper "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."
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"It's an academic piece, not an advice column," cautioned White, an associate professor of law at the University of Arizona. He has been taking a lot of heat since his 54-page study came out in November.
White's paper contends "millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages." Most of those homeowners, he writes, won't suffer long-term harm to their credit rating if they walk away.
Problem at its worst here
The shocking part of White's findings shows that Northern San Joaquin Valley homeowners have the most out-of-whack mortgage debt in the United States.
Merced County is the nation's worst. For Merced homeowners with mortgages, 85 percent owe more than their houses are worth.
In Stanislaus, 84 percent of mortgaged homes are "underwater," and it's 81 percent for San Joaquin County. Nationwide, 32 percent of homeowners are upside down on their mortgages, according to White.
Many homeowners in the valley owe double or even triple what their homes are worth. White calculated it could take decades for them to build back any equity in their homes. Meanwhile, they are stuck paying far more for housing than is necessary.
If homeowners strategically default on their mortgages instead, White's math shows, they would be far better off financially, and their credit rating could recover enough in two years for them to qualify for new home loans.
Despite the financial benefits, most won't default. "People don't make rational economic decisions. Instead, they are led by emotion," White said in a phone interview last week.
White said systematic societal pressure shames homeowners into continuing to pay their mortgages even when doing so makes no financial sense.
"Lenders guilt and shame people into not exercising their contractual option to default," explained White, noting that such pressure financially benefits lenders. "Banks should bear the consequences of the deal they made."
For most mortgage contracts, the deal is that the house is collateral for the loan. If the borrower stops paying on the loan, the bank agrees to take ownership of the house instead — even if the home has significantly declined in value.
"When they approved many of these mortgages, the banks did not care if a home's collateral could support the loan," White said. But that mistake was not the home buyers' fault. "That's the contract the banks wrote."
So why should homeowners stay in a bad investment and continue to pay far more for housing than is necessary?
"It's not like you shook hands with your neighbor and promised to do something," White said. "A mortgage contract is not an ethical statement. It is a legal document with remedies." Those remedies enable homeowners to walk away.
Belief in 'moral social obligations'
White's paper, however, notes that "81 percent of homeowners believe it is immoral to default on a mortgage."
Bankers have no such moral scruples about doing what's in their financial interest, according to White. When corporations walk away from bad investments, "we call it 'good business,' but when individuals do it we call it 'immoral.' "
"Lenders do not operate according to moral social obligations," said White. That puts homeowners at an economic disadvantage. "It's just a remarkable imbalance."
"This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse," White concludes in his paper.
White said lenders try to scare homeowners into thinking that mortgage default will financially ruin them, but frequently the opposite is true.
For many Stanislaus families who bought during the real estate boom — which peaked four years ago — their monthly mortgage payments are more than double what they would pay in rent for similar houses.
The resale value of Stanislaus homes, meanwhile, has crashed from a median $396,000 to $140,000. Many homeowners now owe $200,000 more than their homes are worth.
White: Banks should share burden
In Stanislaus, 12 percent of all homes have been lost to foreclosure. And more than 15 percent of Stanislaus mortgage payments are 90-plus days delinquent.
"People were doing what their government told them to do. They bought a house, and now they're left holding the bag," White said.
He thinks lenders should share the pain. "The banks want you to believe the story of the irresponsible homeowner (who took out all his home equity to buy toys), but that's not the case for the majority of those underwater," White said.
It's mostly middle-class families who didn't do anything wrong who have lost all their equity, White said. "They have seen their family's primary asset become a financial albatross."
One solution, White said, is for lenders to reduce outstanding loan principals closer to what homes now are worth. He said that would stop strategic defaults.
But banks won't do that, White said, because "they know most people who call and say, 'We're going to walk away,' will not do it. So lenders shame homeowners and scare them, but they do not negotiate in good faith."
Bee staff writer J.N. Sbranti can be reached at email@example.com or 578-2196.