Bankruptcy Law

Law Prof Says Underwater Borrowers Suffer from ‘Norm Asymmetry’


Why are so many underwater borrowers continuing to pay their mortgages, even though it would be cheaper to just walk away?

Millions of borrowers owe more than their homes are worth, but most continue to pay, the New York Times reports. Lenders on the other hand, feel free to play hardball in an effort to maintain healthy profits.

What gives? University of Arizona law professor Brent White suggests an answer. He says that borrowers suffer from a “norm asymmetry” that is forcing them to share a disproportionate burden of the housing collapse. The Times summarizes his argument this way: “It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.”

White suggests that the government is actively cultivating two emotions that are binding homeowners: first, the desire to avoid shame and the guilt of foreclosure, and second, exaggerated anxiety over the consequences of foreclosure.

Another law professor, Eric Posner of the University of Chicago, suggests a prepackaged bankruptcy solution that may benefit both homeowners and lenders, the Times says.

He and economist Luigi Zingales outline their proposal in a Slate article. Underwater homeowners living in ZIP codes where home prices have fallen more than 20 percent would automatically be eligible for a loan modification. The new loan would have to be reduced by a percentage that equals the average decline in neighborhood housing prices. In return, the bank would get half the average future appreciation when the home is later sold.

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