The impending death of loan modification programs for homeowners, of which there have been several, is an economic blessing in disguise.

The San Francisco Chronicle today reports:

Just 31,382 borrowers nationwide had received permanent loan mods as of Nov. 30 under the Home Affordable Modification Program (HAMP), the Treasury Department reported. Meanwhile, First American CoreLogic says that 1.7 million homes are likely to be lost to foreclosure next year.

For a lot of underwater mortgages, the wisest financial decision for the homeowners is to leave and default on the mortgage contract. (The finance industry calls this behavior a “strategic default.”) Strategically defaulting on a loan is irresponsible, un-American, and wrong — and corporations do it all of the time. Slate‘s Daniel Gross writes:

Morgan Stanley, for example, is a gigantic corporation. As of the second quarter, it boasted total capital of $213.2 billion. It certainly has the ability to make good on obligations incurred by its many operating units. But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them. Why? Morgan Stanley foolishly paid top dollar for the buildings in 2007, when prices were really high. The values have plummeted, and tenants are hard to come by.

Et cetera, et cetera.

Meanwhile, a University of Arizona law professor recently published a useful paper (.pdf) on why, precisely, homeowners continue to throw money at remarkably overvalued mortgages when doing so clearly harms their long-term financial health. From the paper:

[M]ost homeowners do not strategically default as a result of two emotional forces: 1) the
desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.

And a bit about those loan modification programs:

Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision.

So:

Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.

And then:

Implicit in this [loan modification] approach is the assumption that home owners are unlikely to default on their mortgage if they can “afford” the monthly payment. In other words, federal policy assumes that homeowners are – for the most part – not “ruthless” and won’t walk away from their mortgages simply because they have negative equity. Most homeowners walk only when they can no longer afford to stay.

Homeowners need to become “ruthless” with their too-costly mortgages to balance out the corporations who are so clearly taking advantage of their good intentions. Perhaps when the government-sponsored modification programs go away completely, consumer behavior will change.