The Situation of Mortgage Defaults

Brent White recently posted his thoughtful paper, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” on SSRN.  Here’s the abstract.

* * *

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

* * *

You can download the paper for free here.  For a sample of related Situationist posts, see “Barbara Ehrenreich – a Situationist,” “The Situation of Subprime Mortgage Contracts – Abstract,” “Retroactive Liability for our Financial Woes,” “The Situation of Credit Card Regulation,” “The Financial Squeeze: Bad Choices or Bad Situations?” “The Situation of the American Middle Class,” “Warren on the Situation of Credit,” “Are Debtors Rational Actors or Situational Characters?,” and “The Situation of College Debt” – Part I, Part II, Part III, and Part IV.

Peer Effects – Abstract

Robert MacCoun, Philip Cook, Clara Muschkin, and Jacob Vigdor have posted their paper, “Distinguishing Spurious and Real Peer Effects: Evidence from Artificial Societies, Small-Group Experiments, and Real Schoolyards,” on SSRN. Here’s the abstract.

* * *

In a variety of important domains, there is considerable correlational evidence suggestive of what are variously referred to as social norm effects, contagion effects, information cascades, or peer effects. It is difficult to statistically identify whether such effects are causal, and there are various non-causal mechanisms that can produce such apparent norm effects. Lab experiments demonstrate that real peer effects occur, but also that apparent cascade or peer effects can be spurious. A curious feature of American local school configuration policy provides an opportunity to identify true peer influences among adolescents. Some school districts send 6th graders to middle school (e.g., 6th-8th grade “junior high”); others retain 6th graders for one additional year in K-6 elementary schools. Using administrative data on public school students in North Carolina, we have found that sixth grade students attending middle schools are much more likely to be cited for discipline problems than those attending elementary school, and the effects appear to persist at least through ninth grade. A plausible explanation is that these effects occur because sixth graders in middle schools are suddenly exposed to two cohorts of older, more delinquent peers.