UMass Amherst economics professor, Nancy Folbre, argues in her NY Times Economix blog that a massive default by “underwater” homeowners would actively reshape policies on home buying and lending. Folbre claims that it would “decisively increase the bargaining power of indebted homeowners, force changes in current federal policy and state regulation, and give individual debtors far more leverage in negotiating with creditors.” However, Folbre points out that most homeowners who are underwater won’t simply “mail their keys to the bankers” because they already love the neighborhood they live in, don’t want to disrupt the flow of their personal lives and feel a moral obligation to their financial commitments.
March 1, 2010
Will ‘Underwater’ Homeowners Make Waves?
By NANCY FOLBREBankers call it “negative equity,” but we all call it being “underwater.” A rising tide of articles point out that a large percentage of American homeowners — perhaps as many as 25 percent — owe significantly more on their homes than current market value.
If the difference between what they owe and what they could get if they sell is small, say less than 10 percent, homeowners may want to hold their breath and hope for the best. After all, home prices will probably rise eventually.
But if the difference is much greater than 10 percent, some experts argue, individuals should just walk away and mail their keys to the bank.
What would happen if all the homeowners in really deep water simply moved out and mailed their keys to the bank within the next six months?
A widespread strategic default would look something like a wildcat strike. It would decisively increase the bargaining power of indebted homeowners, force changes in current federal policy and state regulation, and give individual debtors far more leverage in negotiating with creditors.
Will this happen? The odds are against it. Many underwater homeowners are attached to their homes and neighborhoods and reluctant to disrupt their personal lives.
Bankruptcy significantly damages credit ratings, limiting future ability to borrow. Further, most individuals feel a moral obligation to meet their financial commitments.
On the other hand, evidence is mounting that many homeowners were misled by aggressive, largely unregulated lenders. They didn’t jump underwater — they were pushed.
