Consider the Evidence

More and more Americans are in mortgage default. In some cases the homeowner can no longer afford the mortgage payment. But according to reports in the Financial Times and Wall Street Journal, a growing number of homeowners are choosing to walk away from their mortgage even when not forced to do so by their financial situation.

Why?

For some, no doubt, it’s straightforward economic calculus. One recent estimate suggests that for 10% of homeowners, the largest share since the Great Depression, mortgage debt now exceeds the value of the home. Over the past decade it became easier to get an initial mortgage loan with very little down payment. Many were able to later add a second mortgage (home equity loan); home equity loan debt tripled between 2000 and 2007. With rising home prices, this strategy works: the homeowner can keep up with the loan payments and even accumulate equity. But if home values fall, mortgage debt can easily exceed the market selling price of the home.

A mortgage is a non-recourse loan, which means a borrower in default does not owe the lender anything other than delivery of the loan’s collateral — in this case, the home itself. Defaulting on a mortgage loan in this circumstance therefore makes financial sense (at least in the short run, as default reduces the chances of getting a future loan). Some simply pack up and send the keys to the bank. For those who want to be certain the relevant paperwork is handled properly, a New York Times story tells of at least one newly-founded company, You Walk Away, that will take care of it for $995.

What is the role of norms here? Traditionally, losing one’s home has carried a stigma. Stigma can be a powerful deterrent to behavior that might otherwise bring financial and/or psychological benefit. Think of use of illicit drugs, divorce, out-of-wedlock childbearing, not attending church on Sunday, abortion, homosexuality.

Frequently, stigma has delayed widespread adoption or public acknowledgment of behaviors such as these for a considerable period of time. That doesn’t seem to be the case with mortgage default. I don’t know what share of people who could afford to keep paying are walking out on their mortgage loan, but the reports suggest it is nontrivial. If so, why hasn’t stigma acted as a more powerful brake?

One possibility is that the rate at which stigma’s influence declines has accelerated. Stigma associated with a behavior tends to recede when it is widely recognized that the behavior is fairly common. It may be that heightened access to information is dramatically shortening stigma’s influence. Mark Thoma suggests this as a possible factor in the rise of mortgage defaults.

My vague sense is that stigma’s influence declined more rapidly for out-of-wedlock childbearing than for divorce, and did so more rapidly still for homosexuality. As one indicator, the following chart shows the share of Americans saying homosexuality is “always wrong” since the early 1970s (the data are from the General Social Survey here). After holding constant during the 1970s and 1980s, the share fell by nearly 20 percentage points in the early 1990s (more discussion here).

Is the apparent acceleration in the pace of stigma’s decline real? Are there other examples?