Moral and Social Constraints to Strategic Default on Mortgages
AbstractWe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15145.
Date of creation: Jul 2009
Date of revision:
Note: AP CF
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2009. "Moral and Social Constraints to Strategic Default on Mortgages," CEPR Discussion Papers 7352, C.E.P.R. Discussion Papers.
- Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Moral and Social Constraints to Strategic Default on Mortgages," Economics Working Papers ECO2009/27, European University Institute.
- Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Moral and Social Constraints to Strategic Default on Mortgages," EIEF Working Papers Series 0905, Einaudi Institute for Economics and Finance (EIEF), revised Jun 2009.
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- G01 - Financial Economics - - General - - - Financial Crises
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-07-11 (All new papers)
- NEP-BEC-2009-07-11 (Business Economics)
- NEP-RMG-2009-07-11 (Risk Management)
- NEP-SOC-2009-07-11 (Social Norms & Social Capital)
- NEP-URE-2009-07-11 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
- Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007.
"Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures,"
07-15, Federal Reserve Bank of Boston.
- 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.
- Quigley, John M., 1993.
"Explicit Tests of Contingent Claims Models of Mortgage Defaults,"
Department of Economics, Working Paper Series
qt3df5357v, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- 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, vol. 11(2), pages 99-117, September.
- John M. Quigley., 1993. "Explicit Tests of Contingent Claims Models of Mortgage Defaults," Economics Working Papers 93-221, University of California at Berkeley.
- 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.
- 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.
- 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.
- Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008.
"Negative equity and foreclosure: theory and evidence,"
Public Policy Discussion Paper
08-3, Federal Reserve Bank of Boston.
- 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.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Strategic Default: Watch Elites Freak Out To the Trend That Isnâ??t Happening.
by Mike in Rortybomb on 2011-01-11 17:01:15
- Strategic Default: Elites Freak Out Over Imaginary Problem
by Mike Konczal in new deal 2.0 on 2011-01-12 14:35:38
- 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, vol. 22(2), pages 100-118.
- 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.
- Campbell, John Y. & Cocco, João F., 2014.
"A model of mortgage default,"
CFS Working Paper Series
452, Center for Financial Studies (CFS).
- Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010.
Working Paper Series
WP-2010-17, Federal Reserve Bank of Chicago.
- 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.
- Daniel Roesch & Harald Scheule, 2011.
"Securitization Rating Performance and Agency Incentives,"
182011, Hong Kong Institute for Monetary Research.
- 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.
- 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.
- Campbell, Gareth, 2010. "Leveraging the British Railway Mania: Derivatives for the Individual Investor," MPRA Paper 21822, University Library of Munich, Germany.
- John Y. Campbell, 2012.
"Mortgage Market Design,"
NBER Working Papers
18339, National Bureau of Economic Research, Inc.
- 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.
- Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013.
"Systemic risk and the refinancing ratchet effect,"
Journal of Financial Economics,
Elsevier, vol. 108(1), pages 29-45.
- Amir E. Khandani & Andrew W. Lo & Robert C. Merton, 2009. "Systemic Risk and the Refinancing Ratchet Effect," NBER Working Papers 15362, National Bureau of Economic Research, Inc.
- 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.
- Valletta, Robert G., 2013. "House lock and structural unemployment," Labour Economics, Elsevier, vol. 25(C), pages 86-97.
- Børsum, Øystein, 2010. "Contagious Mortgage Default," Memorandum 10/2010, Oslo University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.