Moral and Social Constraints to Strategic Default on Mortgages

Luigi Guiso, Luigi Zingales and Paola Sapienza

No 7352, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Foreclosure; Moral constraint; Mortgage; Social constraint; Strategic default (search for similar items in EconPapers)
JEL-codes: D12 G01 G18 G21 G33 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-bec, nep-rmg, nep-soc and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (56)

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Related works:
Working Paper: Moral and Social Constraints to Strategic Default on Mortgages (2009)
Working Paper: Moral and Social Constraints to Strategic Default on Mortgages (2009)
Working Paper: Moral and Social Constraints to Strategic Default on Mortgages (2009)
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