Motivating Contexts and Meaning in Homeownership: The Path to Foreclosure

Author: Hannah Thomas

Dissertation School: Brandeis University

Pages: 38

Publication Date: 03/2009

Availability:
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Access Number: 5033

Abstract:

Policymakers are struggling to respond to the subprime mortgage foreclosure crisis in real time (Rosengren 2008). As the foreclosure rate continues to increase across the nation, the entire financial system, leveraged on top of subprime mortgage backed securities, is in crisis. While newspaper articles have focused on the losses that both investors and homeowners face, the majority of the academic, mostly economic, literature to date has posited two key reasons for the development of the foreclosure crisis: risky borrowers and falling real estate prices (Gerardi, Shapiro, and Willen 2007). While this analysis offers some value, it is an overly simplistic statement of the current problem. Conversely, another body of literature rooted in the perspective of community development practitioners and consumer advocates point to the critical role of bad lending and predatory lending practices disproportionately targeting minority groups in the current failure of the subprime mortgage market (Ernst et al. 2006; Holloway 1998; Holloway and Wyly 1999; Ross 1996; Schill and Wachter 1993). While there are valid points made in both of these literatures, there is a real gap in bridging these two arguments with the economists taking a "blame the victim" perspective, and the community development practitioners "blaming the industry." The result is that valuable information regarding the actual experience of the borrower is lost, and consequentially statistical modeling of borrower behavior and decisionmaking remains limited.

In the following paper, based on a sample of interviews with borrowers either close to, or in foreclosure in two cities in Massachusetts in 2007 and 2008, I will attempt to develop a more nuanced understanding of borrower decisions, as well as the circumstances and context that have caused people to go into foreclosure in the last two years. In this paper, I will specifically ask why it is that homeowners who are in financial trouble do not decide to dispose of their homes at an earlier point. Economists have proposed two possible reasons why borrowers do not dispose of their home earlier. The first is that a borrower with a house in negative equity will be unable to sell the house (Elul 2006; Foote, Gerardi, and Willen 2008; Gerardi, Shapiro, and Willen 2007). The second, emerging from behavioral economics, is that humans tend to steer away from acknowledging a negative loss if there is a chance that they will be able to avoid the loss altogether (Mayer and Sinai 2007). In this paper I will suggest that a third and very important psycho-social reason has been ignored in the foreclosure literature to date: the role of meanings of home. I will suggest that the meanings associated with the home will impact the decisionmaking process to stay in or leave the house, resulting in a household continuing to make mortgage payments even after it stops making financial sense for the household to do so.

I will begin by examining traditional economic theories of borrowing decisionmaking: whether to continue paying the mortgage or to default (that is, let the house go to foreclosure). I suggest that these models are only focused on the financial incentives to make this decision, and that in omitting social meanings associated with the home they miss one of several important non-financial incentives in making the financial decision. The result is a foreclosure management process that does not account for the social impacts of leaving the home and instead focuses only on the financial ones. I will then examine sociologists' theories of meanings associated with the home and homeownership. I develop a framework of two levels of meaning that impact decisionmaking: contextual motivations and specific meanings of the home. This second category of specific meanings can further be split between use meanings and symbolic meanings. I argue that it is important to look at these meanings, since they motivate decisions to continued paying the mortgage exhausting available assets and equity that ultimately in many cases leads to a forced decision to let the house go to foreclosure. This is a situation that logically may have worse outcomes for a family or household, rather than a voluntary decision to let the house go to foreclosure earlier in the process.

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