Legal Versus Psychological Contracts: When Does a Mortgage Default Settlement Contract Become a Contract?

Jackson T. Anderson (), David M. Harrison (), Kimberly F. Luchtenberg () and Michael Seiler ()
Additional contact information
Jackson T. Anderson: Claremont McKenna College
David M. Harrison: University of Central Florida
Kimberly F. Luchtenberg: American University

The Journal of Real Estate Finance and Economics, 2023, vol. 67, issue 2, No 1, 217 pages

Abstract: Abstract This study increases understanding of the mortgage default settlement process by examining how borrowers make decisions during contract negotiations. We explore two main research questions: (1) Do borrowers experience a difference between psychological and legal contracts? and (2) Does inequity aversion, or the dislike of being taken advantage of, influence the willingness of a borrower to withdraw from a mortgage default settlement contract? Our findings suggest borrowers do not conflate legal versus psychological contracts in this setting, a result which contradicts previous research findings. Moreover, as defaulting borrowers appear to place relatively little value on a clean credit report, they do not differentially enter/withdraw from contract negotiations based on a lender’s unwillingness/inability to clear their credit report. These findings, which run counter to conventional wisdom, may well reflect the emerging divide in the U.S. between individuals and large institutions. Specifically, borrowers do not appear to trust lending institutions, nor do they seem to care deeply about conventional underwriting and risk signaling metrics such as credit reports. Thus, in order to successfully and optimally resolve the voluminous magnitude of outstanding, toxic mortgage debt, a revolutionary new approach to negotiating with borrowers that reflects these new norms must be considered. Examination of a second dataset suggests these results are based on the cultural and legal environment in the U.S., and therefore may not be generalizable to other countries.

Keywords: Mortgage default; Settlement agreements; Psychological contracts; Mutual assent (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s11146-020-09748-7 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jrefec:v:67:y:2023:i:2:d:10.1007_s11146-020-09748-7

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/11146/PS2

DOI: 10.1007/s11146-020-09748-7

Access Statistics for this article

The Journal of Real Estate Finance and Economics is currently edited by Steven R. Grenadier, James B. Kau and C.F. Sirmans

More articles in The Journal of Real Estate Finance and Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().