Millions of Americans, whose homes are now worth significantly less than their mortgage, could be making an expensive mistake by continuing to try and pay their loan off when they should, instead, be walking away. In fact, owners are willing to keep piling money into a losing investment simply because they're ashamed to foreclose, according to a controversial new study.
"Homeowners should be walking away in droves. But they aren't," writes Brent White, an associate professor of law at the University of Arizona.
He explains that some owners who bought at the peak of the market now owe more on their mortgage than they can ever recoup in their lifetime. Although it would make financial sense to cut losses and abandon their homes, feelings are getting in the way. "A lot of it has to do with shame, guilt and fear," says White.
Critics say advising someone to walk away from their home is irresponsible.
But White argues that the math is simple.
In his paper he runs through average scenarios in two states and shows how some middle-class homeowners could save more than $300,000 in just ten years by foreclosing, even after factoring in costs.
White made his case in a study entitled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis," which was published in the latest issue of Arizona Legal Studies.
In some parts of the country, including Arizona, California and Florida, home prices have fallen by more than half, while rents have also dropped, White says. As a result, if you bought an average-priced home in 2006, it's likely that your mortgage payment is significantly more -- by up to three times more -- than the cost of just renting a similar home in your area.
But Americans don't care about the math.
"Going through foreclosure is an admission of failure," says Jeremy Tobacman, an assistant professor of business at The Wharton School in Pennsylvania. "People like to fulfill their obligations.
In addition, homeowners have an exaggerated fear about the consequences of foreclosure -- a fear that is fueled by banks, White said. He says many Americans mistakenly believe foreclosing on a home will irreparably damage their credit score or cost them more than they can afford.
More than 15 million Americans -- a whopping third of all homeowners -- are currently underwater, which means their home is now worth less than their mortgage, but only 4.5 percent are in foreclosure, according to latest figures from the Mortgage Bankers Association.
Not surprisingly, few industry insiders agree with White's findings. They say foreclosure should be a last resort taken only after pursuing all other options, including modifications and short sales. Adam Pedowitz, spokesperson for the Distressed Property Institute, which trains real estate agents in selling distressed homes, says foreclosure has negative implications for an individual's credit score, tax liability, even the ability to find a job.
"It's irresponsible for anyone to advocate that employed homeowners should walk away from their mortgage -- a contractual obligation -- simply because their home is temporarily worth less than the purchase amount," says Sarah Tinsley, a spokeswoman for the Mortgage Bankers Association. "Nobody benefits from foreclosure."