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Moral and Social Constraints to Strategic Default on Mortgages

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  • Guiso, Luigi
  • Sapienza, Paola
  • Zingales, Luigi

Abstract

We use survey data to study American households’ propensity to default when the value of their mortgage exceeds the value of their house even if they can afford to pay their mortgage (strategic default). We find that 26% of the existing defaults are strategic. We also find that no household would default if the equity shortfall is less than 10% of the value of the house. Yet, 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house. Besides relocation costs, the most important variables in predicting strategic default are moral and social considerations. Ceteris paribus, people who consider it immoral to default are at 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so. The willingness to default increases nonlinearly with the proportion of foreclosures in the same ZIP code. That moral attitudes toward default do not change with the percentage of foreclosures is likely to derive from a contagion effect that reduces the social stigma associated with default as defaults become more common.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7352.

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Date of creation: Jul 2009
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Handle: RePEc:cpr:ceprdp:7352

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Keywords: foreclosure; moral constraint; mortgage; social constraint; strategic default;

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  1. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-31, August.
  2. Quigley, John M & Van Order, Robert, 1995. "Explicit Tests of Contingent Claims Models of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 11(2), pages 99-117, September.
  3. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper, Federal Reserve Bank of Boston 08-3, Federal Reserve Bank of Boston.
  4. Paul S. Willen & Adam Hale Shapiro & Kristopher Gerardi, 2008. "Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures," 2008 Meeting Papers 345, Society for Economic Dynamics.
  5. Deng, Yongheng & Quigley, John M. & Van Order, Robert, 1999. "Mortgage Terminations, Heterogeneity, and the Exercise of Mortgage Options," Berkeley Program on Housing and Urban Policy, Working Paper Series, Berkeley Program on Housing and Urban Policy qt96r560pg, Berkeley Program on Housing and Urban Policy.
  6. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(4), pages 1449-1496, November.
  7. Kerry D. Vandell, 1993. "Handing Over the Keys: A Perspective on Mortgage Default Research," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 211-246.
  8. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Strategic Default: Watch Elites Freak Out To the Trend That Isn’t Happening.
    by Mike in Rortybomb on 2011-01-11 17:01:15
  2. Strategic Default: Elites Freak Out Over Imaginary Problem
    by Mike Konczal in new deal 2.0 on 2011-01-12 14:35:38
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Michael J. Seiler & David M. Harrison, 2011. "Perceived Versus Actual Susceptibility to Normative Influence in the Presence of Defaulting Landlords," Review of Behavioral Finance, Emerald Group Publishing, vol. 3(2), pages 55-77, November.
  2. Campbell, Gareth, 2010. "Leveraging the British Railway Mania: Derivatives for the Individual Investor," MPRA Paper 21822, University Library of Munich, Germany.
  3. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, European Finance Association, vol. 17(1), pages 1-33.
  4. Yuan Cheng & Xuehui Han, 2013. "Does large volatility help?—stochastic population forecasting technology in explaining real estate price process," Journal of Population Economics, Springer, Springer, vol. 26(1), pages 323-356, January.
  5. Bechlioulis, Alexandros & Brissimis, Sophocles, 2014. "Consumer default and optimal consumption decisions," MPRA Paper 56864, University Library of Munich, Germany.
  6. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2013. "The role of neighborhood characteristics in mortgage default risk: Evidence from New York City," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(2), pages 100-118.
  7. Amir E. Khandani & Andrew W. Lo & Robert C. Merton, 2009. "Systemic Risk and the Refinancing Ratchet Effect," Harvard Business School Working Papers 10-023, Harvard Business School, revised Jul 2010.
  8. Benjamin J. Keys & Tomasz Piskorski & Amit Seru & Vikrant Vig, 2012. "Mortgage Financing in the Housing Boom and Bust," NBER Chapters, in: Housing and the Financial Crisis, pages 143-204 National Bureau of Economic Research, Inc.
  9. Daniel Rösch & Harald Scheule, 2011. "Securitization rating performance and agency incentives," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 287-314 Bank for International Settlements.
  10. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010. "Complex mortgages," Working Paper Series, Federal Reserve Bank of Chicago WP-2010-17, Federal Reserve Bank of Chicago.
  11. Valletta, Robert G., 2013. "House lock and structural unemployment," Labour Economics, Elsevier, vol. 25(C), pages 86-97.
  12. Campbell, John Y. & Cocco, João F., 2014. "A model of mortgage default," CFS Working Paper Series 452, Center for Financial Studies (CFS).
  13. Børsum, Øystein, 2010. "Contagious Mortgage Default," Memorandum 10/2010, Oslo University, Department of Economics.

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