Financial Literacy, Social Perception and Strategic Default

37 Pages Posted: 10 Jul 2012

See all articles by Jeremy Burke

Jeremy Burke

Center for Economic and Social Research (CESR)

Kata Mihaly

RAND Corporation

Date Written: June 1, 2012

Abstract

As a result of sustained housing market fragility, a growing number of borrowers are walking away from their underwater homes even though they have the ability to pay. Despite recent advances, questions remain about what influences this decision. In this paper, we use survey data to examine the roles of social expectations, financial literacy and knowledge of default consequences. We find that homeowners who believe that others are likely to strategically default in the future are more willing to walk away as they anticipate reduced social stigma. Financially literate borrowers appear better able to calculate the benefits of strategically defaulting and are more willing to walk away at high levels of shortfall. We also find evidence that those who better understand the consequences of default, particularly that a default’s impact on one’s credit score weakens over time, have a higher willingness to walk away. Our results suggest that policies that help shape expectations about future strategic defaults may influence present foreclosures.

Suggested Citation

Burke, Jeremy and Mihaly, Kata, Financial Literacy, Social Perception and Strategic Default (June 1, 2012). Available at SSRN: https://ssrn.com/abstract=2102648 or http://dx.doi.org/10.2139/ssrn.2102648

Jeremy Burke (Contact Author)

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

Kata Mihaly

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

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