Walking away from a mortgage

Over the weekend a University of Chicago economist named Richard Thaler wrote a column in the business section of the New York Times in which he argued that more homeowners who are under water with their mortgages (i.e., they owe more on the mortgage than the house is worth) should just walk away and allow the lender to foreclose rather than continuing to make payments on the debt. In the big picture, such “strategic defaults” would get the attention of lenders and force them to be serious about negotiating loan modifications. For individual homeowners, monthly rental payments for comparable properties would be far more affordable than the monthly mortgage payments they continue to make. Over a ten-year period, reducing housing costs in this manner could save individuals tens of thousands of dollars, more than offsetting the disruption of moving, the social stigma of defaulting, and the exposure to a deficiency lawsuit.

Thaler doubts that many Americans will choose this course of action. They have been conditioned to see such purposeful defaults as immoral, even though businesses routinely follow such paths with little if any criticism. But social norms change, so if walking away from an onerous mortgage becomes more common, it will quickly become an acceptable course of conduct to most Americans.