Excellent and informative paper on the role of shame, guilt and fear and it's use by government and the financial industry, credit reporting agencies, etc. to manipulate borrowers onto bearing the brunt of the cost of the housing collapse.
Arizona Legal Studies
Discussion Paper No. 09-35
Underwater and Not Walking Away: Shame, Fear and the Social Management of the
Housing Crisis
Brent T. White
The University of Arizona James E. Rogers College of Law
December 2009
snip
But lenders, of course, do not operate according norms of personal responsibility, and seek instead to maximize profit (or minimize losses). Indeed, to the extent that the lender is a corporation, the directors and executives of the corporation have a legal duty to shareholders to maximize profit and/or minimize losses. Appealing to this duty, it has been suggested that, given the great cost to lenders of foreclosure, they have an economic incentive to modify loans for homeowners in danger of default. This argument has flown in the face of the reality, however, that lenders have been reluctant to modify loans, even for borrowers in the pre-foreclosure process.
Recent studies seeking to explain this apparently irrational behavior have shown that lenders are simply operating to maximize profit and minimize losses, just as they would be expected to do. First, lenders know that borrowers with high credit scores are unlikely to default even at high levels of negative equity. To modify loans for these homeowners would be to throw money away – and to encourage more homeowners to ask modifications. Second, a significant number of homeowners who temporarily default on their mortgages “self-cure” without any help from their lender – though self cure rates have dropped precipitously in the last two years. Again, to modify the loans of individuals who would otherwise self cure would be to throw away money. Third, homeowners with poor credit, or who end up in arrears because of “triggering events” such as unemployment, divorce, or other financially devastating circumstances are likely to default on the modified loan as well. To modify loans for these individuals is to waste time and risk housing prices falling further before the lender eventually has to foreclosure and sell the property anyway.
Given these economic incentives for the lender, a seriously underwater homeowner with good credit and solid mortgage payment history who responsibly calls his lender to work out a loan modification is likely to be told by his lender that it will not discuss a loan modification until the homeowner is 30 days or more delinquent on his mortgage payment. The lender is making a bet (and a good one) that the homeowner values his credit score too much to miss a payment and will just give up the idea of a loan modification. However, if the homeowner does what the lender suggests, misses a payment, and calls back to discuss a loan modification in 30 days, the homeowner is likely to be told to call back when he is 90 days delinquent.In the meantime, the lender will send the borrower a series of strongly worded notices reminding him of his moral obligation to pay and threatening legal action, including foreclosure and a deficiency judgment, if the homeowner does not bring his mortgage payments current. The lender is again making a bet (and again a good one) that the homeowner will be shamed or frightened into paying their mortgage. If the homeowner calls the lender’s bluff and calls back when he is 90 days delinquent, there is a good possibility that he will be told that his credit score is now so low that he does not qualify for a loan modification. The homeowner must then decide whether to bring the loan current or face foreclosure. If the homeowner somehow makes clear to the lender that he has chosen foreclosure, the lender may finally be willing to negotiate a loan modification, a short-sale or a deed-in-lieu of foreclosure – all of which still leave the homeowner’s credit in tatters (at least temporary).
Most lenders will, in other words, take full advantage of the asymmetry of norms between lender and homeowner and will use the threat of damaging the borrower’s credit score to bring the homeowner into compliance. Additionally, many lenders will only bargain when the threat of damaging the homeowner’s credit has lost its force and it becomes clear to the lender that foreclosure is imminent absent some accommodation. On a fundamental level, the asymmetry of moral norms for borrowers and market norms for lenders gives lenders an unfair advantage in negotiations related to the enforcement of contractual rights and obligations, including the borrower’s right to exercise the put option. This imbalance is exaggerated by the credit reporting system, which gives lenders the power to threaten borrowers’ human worth and social status by damaging their credit scores – scores that serve as much as grades for moral character as they do for creditworthiness.
The result is a predictable imbalance in which individual homeowners have born a huge and disproportionate burden of the housing collapse.
Much more at the link.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467Fear stories are essential to keep regular people from doing what is best financially for themselves and their families.
Take the time to read the study. You are being manipulated.
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