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The Effect of Perceived Lender Characteristics and Market Conditions on Strategic Mortgage Defaults

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  • Michael J. Seiler

Abstract

Inequity Aversion has long been applied in a game theoretic setting to explain that individuals are willing to sacrifice personal wealth in order to financially penalize players they perceive to be acting selfishly or unfairly. I apply inequity aversion to strategic mortgage default decisions and find that individual homeowners (as well as a second sample of professional mortgage lenders) have a differential stated willingness to walk away from their mortgage based on the perceived characteristics of their lender. Importantly, these significant differences can be removed even with extremely modest loan modifications. Finally, I document that regular homeowners and even professional lenders do a poor job differentiating between the owner of their loan and the servicer of their loan. This is particularly troubling given the extreme misconception of their bank's true character. As a result, much of their willingness to penalize is misplaced resulting in an unnecessary number of strategic mortgage defaults.

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  • Michael J. Seiler, 2014. "The Effect of Perceived Lender Characteristics and Market Conditions on Strategic Mortgage Defaults," Framed Field Experiments 00628, The Field Experiments Website.
    • Handle: RePEc:feb:framed:00628
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    Cited by:

    1. David M. Harrison & Kimberly F. Luchtenberg & Michael J. Seiler, 2023. "Improving Mortgage Default Collection Efforts by Employing the Decoy Effect," The Journal of Real Estate Finance and Economics, Springer, vol. 66(4), pages 840-860, May.
    2. Seiler, Michael J., 2015. "The role of informational uncertainty in the decision to strategically default," Journal of Housing Economics, Elsevier, vol. 27(C), pages 49-59.
    3. David Nickerson, 2016. "Asset Price Volatility, Credit Rationing and Rational Lending Discrimination," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(10), pages 140-158, October.
    4. Jackson T. Anderson & David M. Harrison & Kimberly F. Luchtenberg & Michael J. Seiler, 2023. "Legal Versus Psychological Contracts: When Does a Mortgage Default Settlement Contract Become a Contract?," The Journal of Real Estate Finance and Economics, Springer, vol. 67(2), pages 191-217, August.
    5. Hirota, Shinichi & Suzuki-Löffelholz, Kumi & Udagawa, Daisuke, 2020. "Does owners’ purchase price affect rent offered? Experimental evidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    6. Michael J. Seiler, 2017. "Do Liquidated Damages Clauses Affect Strategic Mortgage Default Morality? A Test of the Disjunctive Thesis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(1), pages 204-230, February.
    7. Mark A. Lane & Michael J. Seiler & Vicky L Seiler, 2015. "The Impact of Staging Conditions on Residential Real Estate Demand," Framed Field Experiments 00631, The Field Experiments Website.
    8. Lingxiao Li & Erdem Ucar & Abdullah Yavas, 2022. "Social Capital and Mortgage Delinquency," The Journal of Real Estate Finance and Economics, Springer, vol. 64(3), pages 379-403, April.
    9. Kristin Aarland & Anna Maria Santiago, 2023. "Serious Mortgage Arrears among Immigrant Descendant and Native Participants in a Low-Income Public Starter Mortgage Program: Evidence from Norway," Societies, MDPI, vol. 13(5), pages 1-28, May.
    10. Yang Zhang & Hong Zhang & Michael J. Seiler, 2016. "The Effects of Time Constraints on Broker Behavior in China¡¦s Resale Housing Market: Theory and Evidence," International Real Estate Review, Global Social Science Institute, vol. 19(3), pages 353-370.
    11. Michael J. Seiler, 2016. "The Perceived Moral Reprehensibility of Strategic Mortgage Default," Framed Field Experiments 00622, The Field Experiments Website.

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