It is getting really old, the exasperation of entitled financial journalists that ordinary folks are not walking away from their underwater homes as much as they supposedly should. The latest to sound this tired refrain is James Surowiecki in The New Yorker (Living By Default, Dec. 19, 2011), who also makes the clichéd comparison to corporate decisions to shed debt using chapter 11 bankruptcy. He calls on underwater homeowners to do "the smart thing" by walking away.
According to Mitt Romney, “Corporations are people.” Whether or not you agree with that proposition, what is empirically true when it comes to debt is that people are not corporations. People don’t view walking away from debts that they can afford as a no brainer if it improves the bottom line. They agonize. They feel bad. They care about their homes and neighborhoods. Walking away is extremely painful, not a simple financial calculation. And, oh by the way, the further down you are in the 99 percent, the more likely that the financial calculation is negative, given impact on credit reputation from defaulting on a mortgage when your income is low. (On the other hand, many people worry about their credit reputations way after they have hit bottom and bankruptcy could actually improve their access to credit, more evidence that people don't take bankruptcy or any other form of walking away lightly.)