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Moral and Social Constraints to Strategic Default on Mortgages

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  • Luigi Guiso
  • Paola Sapienza
  • Luigi Zingales

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15145.

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Date of creation: Jul 2009
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Handle: RePEc:nbr:nberwo:15145

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  1. John M. Quigley., 1993. "Explicit Tests of Contingent Claims Models of Mortgage Defaults," Economics Working Papers 93-221, University of California at Berkeley.
  2. John Y. Campbell & Stefano Giglio & Parag Pathak, 2009. "Forced Sales and House Prices," NBER Working Papers 14866, National Bureau of Economic Research, Inc.
  3. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
  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. 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 qt96r560pg, Berkeley Program on Housing and Urban Policy.
  6. 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.
  7. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
  8. 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, vol. 124(4), pages 1449-1496, November.
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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. Campbell, Gareth, 2010. "Leveraging the British Railway Mania: Derivatives for the Individual Investor," MPRA Paper 21822, University Library of Munich, Germany.
  2. Yuan Cheng & Xuehui Han, 2013. "Does large volatility help?—stochastic population forecasting technology in explaining real estate price process," Journal of Population Economics, Springer, vol. 26(1), pages 323-356, January.
  3. 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.
  4. Daniel Roesch & Harald Scheule, 2011. "Securitization Rating Performance and Agency Incentives," Working Papers 182011, Hong Kong Institute for Monetary Research.
  5. 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.
  6. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010. "Complex mortgages," Working Paper Series WP-2010-17, Federal Reserve Bank of Chicago.
  7. John Y. Campbell & João F. Cocco, 2011. "A Model of Mortgage Default," NBER Working Papers 17516, 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. Valletta, Robert G., 2013. "House lock and structural unemployment," Labour Economics, Elsevier, vol. 25(C), pages 86-97.

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