Moral and Social Constraints to Strategic Default on Mortgages

34 Pages Posted: 21 Jul 2009 Last revised: 21 May 2023

See all articles by Luigi Guiso

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF); Einaudi Institute for Economics and Finance

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: July 2009

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.

Suggested Citation

Guiso, Luigi and Guiso, Luigi and Sapienza, Paola and Zingales, Luigi, Moral and Social Constraints to Strategic Default on Mortgages (July 2009). NBER Working Paper No. w15145, Available at SSRN: https://ssrn.com/abstract=1434660

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

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Einaudi Institute for Economics and Finance ( email )

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rome, 00187
Italy

Paola Sapienza (Contact Author)

Northwestern University - Kellogg School of Management - Department of Finance ( email )

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United States
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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Luigi Zingales

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Belgium

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