Norms and the Case for Key Mail

I mentioned this paper in passing earlier, but it really deserves a closer read. The idea? That societal norms cause people to act against their best interests – and disfavor them versus lenders in mortgager/mortgagee relationships – by preventing them from sending in “key mail” when they owe more on their mortgage than their house is worth.

Here is the abstract, but the essence is that societal fear and shame create a behavioral bias preventing people from acting in their best interests. The same norms do not exist for companies holding the mortgages.

Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

And a key paragraph:

Moreover, fear, shame, and guilt are not mere “transaction costs” that homeowners calculate according to their own personal tolerance for each. Rather, these emotional constraints are actively cultivated by the government, the financial industry, and other social control agents in order to induce individual homeowners to act in ways that are against their own self interest, but which are – wrongly this article contends – argued to be socially beneficial. Unlike lenders who seek to maximize profits irrespective of concerns of morality or social responsibility, individual homeowners are encouraged to behave in accordance with social and moral norms requiring that individuals keep promises and honor financial obligations.