The Role of Informational Uncertainty in the Decision to Strategically Default

Abstract

This study identifies a severe gap between the financial backlash borrowers believe awaits them after strategic mortgage default and the reality that lenders rarely pursue deficiency judgments. This, coupled with the social norm finding that borrowers widely view strategic default as immoral, leads us to recommend lenders and policymakers seeking to stem the tide of defaults to pursue a policy of informational opacity. We make several policy recommendations for how to carry out such a policy as well as what might need to change in society before the alternative policy of informational transparency becomes Pareto optimal.

Keywords: strategic mortgage default, informational transparency/opacity, informational uncertainty, lender recourse