Academic

One story you hear about the crisis is how selfish mortgage borrowers gamed the system by intentionally taking out mortgages they couldn?t afford knowing that they could walk away if housing prices nose-dived.

Brent White (Arizona) asks a fascinating question ? namely why haven?t more underwater borrowers walked away. His paper, which he gave at New Mexico's colloquium in the fall, is well worth reading. Brent has gotten a lot of deserved press coverage, including in the upcoming NY Times Magazine this Sunday.

You might conclude that Brent underestimates the costs of walking away. For example, credit history may take longer to rebuild than he estimates. Or perhaps there are other costs to moving from a home to a rental neighborhood. You might also find that Brent underestimates the time it will take housing prices to recover ? perhaps the housing market is in a negative bubble now.

But even accepting these counterarguments would still leave a large number of homeowners for whom the rational decision would be to leave the keys in the mailbox. Why are these homeowners not walking away?

Brent thinks it is because of norms and emotions, which are being reinforced by messages from the media, the financial industry, and the government. Or, as an alternative to Brent?s explanation, perhaps homeowners are making a miscalculation because of cognitive biases. No matter the reason, this is a huge story.

You might disagree with Brent?s policy conclusions, which include clamping down on credit reporting to allow more underwater borrowers to make the rational decision. I disagree with him because I think it would be truly calamitous if more underwater borrowers walked away in droves.

But Brent puts his finger on a huge problem: the fragile economy is resting on the backs of many homeowners who are (perhaps unwittingly) making a very bad investment decision. You might think of the current situation as a implicit regressive tax on ?moral? homeowners. More relief for these homeowners is in order ? to prevent a mass walk-away if not to redress an inequity. Of course, lessening the moral burden on underwater homeowners raises the possibility of moral hazard.

Some industry critics have questioned Brent?s ethics in raising this issue. But are only large corporations entitled to use efficient breach?  Should we stick our heads in the sand and hope more homeowners don't do the math?  Should we accept an enormously regressive "tax" on homeowners?