The Determinants of Attitudes Towards Strategic Default on Mortgages∗
June 2011 The Determinants of Attitudes towards Strategic Default on Mortgages∗ Luigi Guiso European University Institute, EIEF, & CEPR Paola Sapienza Northwestern University, NBER, & CEPR Luigi Zingales University of Chicago, NBER, & CEPR Abstract We use survey data to measure households’ propensity to default on mortgages even if they can afford to pay them (strategic default) when the value of the mortgage exceeds the value of the house. The willingness to default increases both in the absolute and in the relative size of the home- equity shortfall. Our evidence suggests that this willingness is affected both by pecuniary and non- pecuniary factors, such as views about fairness and morality. We also find that exposure to other people who strategically defaulted increases the propensity to default strategically because it conveys information about the probability of being sued. ∗ An earlier version of this paper circulated with the title “Moral and Social Constraints to Strategic Default on Mortgages.” We would like to thank the University of Chicago Booth School of Business and Kellogg School of Management for financial support in establishing and maintaining the Chicago Booth Kellogg School Financial Trust Index. Luigi Guiso is grateful to PEGGED for financial support. We thank Campbell Harvey (editor), Amir Sufi, two anonymous referee and seminar participants at the University of Chicago and New York University for very useful suggestions, Gabriella Santangelo and Filippo Mezzanotti for excellent research assistantship, and Peggy Eppink for editorial help. We also thank Amit Seru for providing us with a time series of actual strategic default within his sample. 1 In 2009, for the first time since the Great Depression, millions of American households found themselves with a mortgage that exceeded the value of their home.
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