Consumer Ruthlessness and Mortgage Default During the 2007 to 2009 Housing Bust

64 Pages Posted: 19 Jun 2010 Last revised: 10 Jun 2017

Neil Bhutta

Board of Governors of the Federal Reserve System

Jane Dokko

U.S. Department of the Treasury

Hui Shan

Board of Governors of the Federal Reserve System

Date Written: November 9, 2016

Abstract

From 2007 to 2009 U.S. house prices plunged and mortgage defaults surged. While ostensibly consistent with widespread “ruthless default,” analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater – far deeper than traditional models predict. The evidence suggests that lender recourse is not the major driver of this result. We argue that emotional and behavioral factors play an important role in decisions to continue paying. Borrower reluctance to walk away implies that the moral hazard cost of default as a form of social insurance may be lower than suspected.

Notes: An older version of this paper circulated under the title, "The Depth of Negative Equity and Mortgage Default Decisions"

Keywords: Housing, mortgage default, negative equity, ruthless default, strategic default, underwater

JEL Classification: D12, G21, R20

Suggested Citation

Bhutta, Neil and Dokko, Jane and Shan, Hui, Consumer Ruthlessness and Mortgage Default During the 2007 to 2009 Housing Bust (November 9, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1626969 or http://dx.doi.org/10.2139/ssrn.1626969

Neil Bhutta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jane Dokko

U.S. Department of the Treasury ( email )

1500 Pennsylvania Avenue
Washington, DC 20220
United States

Hui Shan

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452 3491 (Phone)
(202) 728 5887 (Fax)

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