Law Offices of Robert E. Brown, P.C.
Richard H. Thaler presents an interesting analysis about the next wave of foreclosures that is destined to sweep across the nation. The difference between the on-coming wave and previous waves is that these foreclosures are likely to be spurred less by spells of unemployment and more by strategic thinking.
Mr. Thaler observes that many homeowners are dutifully making mortgage payments when, at least from an economic perspective, it makes no sense to do so. He cites the following all-too-common scenario:
A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.
Thaler attributes this behavior to the prevailing sentiment that it is immoral for borrowers to default on loans. Yet at the same time lenders are free to maximize profits and dispense obscene bonus at their expense. “It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.”
Thaler predicts that this sentiment is likely to transform in the near future as borrowers become increasingly conscious of the "norm asymmetry" that exists between Main Street borrowers and Wall Street financial players.
See Underwater, but Will They Leave the Pool?