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There have been a recent slew of articles along the lines of Emotions Drive Many Mortgage Defaults and The Psychology of Strategic Default by the Wall Street Journal following the publication of a study, Walking Away: The Emotional Drivers of Strategic Default, by Brent White of the University of Arizona Law School.

I know a lot about this from an anecdotal perspective.

Although I agree that strategic default is an emotional decision, I don’t agree that the emotional elements overcome rationality, at least in the cases I deal with. Where people make objectively irrational decisions, it is usually based on false beliefs or premises. For example, they may believe they have no liability or tax exposure when they walk away, but be dead wrong. They are still making a rational decision from their point of view.

But I do not think that is the real point of the Professor White’s study anyway.  What he is saying, I think,  is that the emotional drivers that keep people paying underwater mortgages are very strong, and the decision to engage in strategic default is often triggered by an emotional sense that they are being treated unfairly.  By way of example, people ask “why won’t the bank give me a refinance at current low interest rates because I am underwater when I could just walk away from the loan altogether?” (Its a good point, but misunderstands the role of securitization and banks as mere servicers of most mortgages).

In other words, if you throw underwater borrowers a bone (i.e. unilateral interest rate reduction), they are very likely to stay and pay if they can regardless of whether it is rational to do so.  This is true.   Many strategic defaults are commenced after the borrower feels that they have given the lender a fair chance to make a deal.  Nothing makes a borrower want to default more than being put on hold for hours waiting to speak to some idiot who says there is nothing they can do for you.