Professor: Some Homeowners Better Of Walking Away

Brent White, a law professor at the University of Arizona's James E. Rogers College of Law, says many homeowners who owe more on their mortgages than what the home is worth are not walking away because they have been misguided and led to believe that going into foreclosure is a moral failure and a sign of irresponsibility. In most cases, he says, it makes more financial sense for homeowners to simply walk away. He discusses his paper, "Underwater and Not Walking Away: Fear Shame and the Social Management of the Housing Crisis," with Robert Siegel.

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ROBERT SIEGEL, host:

To walk away or not to walk away: As we've heard, that's a question that Heather Baker, and Milo and Lin White, have answered very differently. Well, now for some surprising expert advice from professor Brent White, who teaches law at the University of Arizona. Welcome to the program, professor White.

Professor BRENT WHITE (Law, University of Arizona): Hi, thank you.

SIEGEL: Now, your paper on this subject is called "Underwater and Not Walking Away: Fear, Shame, and the Social Management of the Housing Crisis." I gather you're saying people should overcome their fear and shame and be prepared to walk away, if that makes sense.

Prof. WHITE: Well, I think I should be clear, in the first instance, that I wrote an academic paper and not an advice column. So I don't actually advise homeowners to do anything. Rather, I simply make an observation that I think is resonating with a lot of people, particularly a lot of underwater homeowners.

And that observation is that many of the 15 million American homeowners who are underwater on their mortgages would be better off financially if they let go of their bad investments, just like a bank or a corporation would do.

A perfect example of this is Morgan Stanley, which walked away from five properties in San Francisco just this month. They essentially just gave the properties back to the bank. The properties had lost 50 percent of their value. Tenants were hard to come by. And Morgan Stanley made a business decision that it would make sense to walk away from the properties. So, the question I asked in my article is that if a bank and corporations can walk away from a mortgage, why shouldn't Joe Homeowner be able to walk away from their mortgage?

SIEGEL: But here's what, as we heard, Milo White told reporter Peter O'Dowd about walking away from his home. He said: We don't feel right about that. We've communicated with the bank at every turn. He's talking about feelings that a corporation doesn't possess. What we do with those misgivings about not being true to our word?

Prof. WHITE: You know, I wouldn't say that they're misgivings. I think that these are deeply held values that many Americans share, a sense of more obligation to pay our debts. A contract is a legal document. It's not an ethical statement. And a contract contains - particularly a mortgage contract in a non-recourse state, like the Whites' mortgage in Arizon - there's a contractual option to default.

SIEGEL: Now, you've raised the phrase, a non-recourse state. You're saying that in some states, if you still owe, say, $120,000 on a mortgage after the property has been sold and the proceeds go to the bank, they don't come after you for the balance of the loan?

Prof. WHITE: That's right. In some states, they're barred from pursuing you for what's called a deficiency judgment - and Arizona would be one of those states. And so that means that the contract - the agreement between the lender and their borrower, by law in a non-recourse state, is that if the homeowner defaults, the bank gets the house.

SIEGEL: How do people know if they're in a recourse state or a non-recourse state?

Prof. WHITE: Well, the best way they can find out is probably to consult with an attorney - a knowledgeable attorney within their state. The unfortunate thing for underwater homeowners is there is a lot of misinformation out there. And if they were to go to, for example, a HUD-approved housing counseling agency, they would probably not be given advice or good information about whether they could walk away when it might make sense to do so, because the policy of the federal government is to try to prevent foreclosure and to get people to make their own payments.

And if you go on the Internet, there's also tons of misinformation out there, intended to scare and shame homeowners into staying in their homes. So it's difficult to find good information, and it is likely going to require someone to seek it out from a knowledgeable attorney.

SIEGEL: Professor Brent White of the University of Arizona. Professor White, thank you very much for talking with us.

Prof. WHITE: Thank you.

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