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Moral and Social Constraints to Strategic Default on Mortgages

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Author Info

  • Luigi Guiso

    (European University Institute, EIEF, and CEPR)

  • Paola Sapienza

    (Northwestern University, NBER, and CEPR)

  • Luigi Zingales

    (University of Chicago, NBER, and CEPR)

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 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 in the area suggests that the correlation between willingness to default and 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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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0905.

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Length: 33 pages
Date of creation: 2009
Date of revision: Jun 2009
Handle: RePEc:eie:wpaper:0905

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  1. Quigley, John M., 1993. "Explicit Tests of Contingent Claims Models of Mortgage Defaults," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt3df5357v, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. 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.
  3. 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.
  4. 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.
  5. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 275-308, March.
  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. Giglio, Stefano & Pathak, Parag & Campbell, John Y., 2011. "Forced Sales and House Prices," Scholarly Articles 9887623, Harvard University Department of Economics.
  8. Kerry D. Vandell, 1993. "Handing Over the Keys: A Perspective on Mortgage Default Research," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 21(3), pages 211-246.
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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 Isnâ??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
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Cited by:
  1. 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.
  2. Valletta, Robert G., 2013. "House lock and structural unemployment," Labour Economics, Elsevier, Elsevier, vol. 25(C), pages 86-97.
  3. Bechlioulis, Alexandros & Brissimis, Sophocles, 2014. "Consumer default and optimal consumption decisions," MPRA Paper 56864, University Library of Munich, Germany.
  4. 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.
  5. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, European Finance Association, vol. 17(1), pages 1-33.
  6. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2011. "The role of neighborhood characteristics in mortgage default risk: evidence from New York City," MPRA Paper 33941, University Library of Munich, Germany.
  7. 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.
  8. 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.
  9. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2011. "Complex Mortgages," NBER Working Papers 17315, National Bureau of Economic Research, Inc.
  10. Amir E. Khandani & Andrew W. Lo & Robert C. Merton, 2009. "Systemic Risk and the Refinancing Ratchet Effect," Harvard Business School Working Papers, Harvard Business School 10-023, Harvard Business School, revised Jul 2010.
  11. Campbell, John Y. & Cocco, João F., 2014. "A model of mortgage default," CFS Working Paper Series 452, Center for Financial Studies (CFS).
  12. Børsum, Øystein, 2010. "Contagious Mortgage Default," Memorandum, Oslo University, Department of Economics 10/2010, Oslo University, Department of Economics.
  13. Campbell, Gareth, 2010. "Leveraging the British Railway Mania: Derivatives for the Individual Investor," MPRA Paper 21822, University Library of Munich, Germany.

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