What do we know about strategic (could meet obligations but choose not to ) defaulters in relation to mortgages?
As I argued earlier, in the Irish case very little is known. There is a little more information for the USA, but we should be very careful about blindly or even carefully transposing US experience to Ireland. The legal, cultural, economic and social climates are very different. We seem to be more tolerant of default than the USA but beyond that…That said, here are what I see as the present state of play. Im sure I have missed some research but for what its worth…
- As few as 15% of US defaults might be strategic (Gerardi et al. 2013) . Or it might be higher (but the methodology (Guiso, Sapienza, and Zingales 2011) used is to ask people, in effect, if they know someone who they think could have repaid but didn’t…) at around 25%. If its not 1/3 or more in the USA with more liberal bankruptcy and recourse laws then is it credible that it is 1/3 here?
- People feel regret but not shame when they default (M J Seiler et al. 2012). There is a massive ‘fear factor’ on which lenders play, as well as asymmetrical fears of moral hazard (White 2010c).
- Default is not just an individual but also a social phenomena and there can be “herding” in defaults (M J Seiler, Lane, and Harrison 2012). This is perhaps an under researched area.
- The bankruptcy code really matters with lower rates the easier it is to strategically default (Edmonds, Stevenson, and Swisher 2011)
- The more you repossess the less a stigma it is and the more likely people are to strategically default (Wilkinson-Ryan 2011). The law of unintended consequences therefore suggests that if we move to a significantly more aggressive repossession culture we will see cascades of defaults with the consequent knocking back of property prices and erosion of bank balance sheets…. be careful for what you wish.
- Less information about the process is useful from the perspective of the lender in reducing the incidence of default (M J Seiler 2013). Theres no doubt that the Irish system is opaque, and perhaps deliberatly so.
- Amongst lower income US households most defaults are not strategic. (Riley 2013)
- There’s a contract between the lender and the borrower but even in law there can be a ranking of contracts and the social/familial contract supersedes this other contract allowing for default. (White 2010b).
- Many defaults precipitate not from rational but from emotional decisions, thus reducing the emotional crises points can and does reduce default (White 2010a). Most people want a fair deal, which allows them to continue servicing debts at a reasonable rate but with certainty about where the future lies.
- People don’t default, strategically or otherwise, until they are deeply underwater, typically negative equity of 67% are required in the USA. (Bhutta, Dokko, and Shan 2011)
- Oh, and some people might be neurologically more inclined to default than others…( Seiler, Walden, and Lane 2012). Might we see MRI scans as well as payslips being required in future before mortgages are approved?
Bhutta, Neil, Jane K. Dokko, and Hui Shan. 2011. “Consumer Ruthlessness and Mortgage Default During the 2007-2009 Housing Bust.” SSRN Electronic Journal (December 31). doi:10.2139/ssrn.1626969. http://papers.ssrn.com/abstract=1626969.
Edmonds, T N, L J Stevenson, and J Swisher. 2011. “Forgive Us Our Debts: The Great Recession of 2008-09.” Journal of Legal, Ethical and Regulatory Issues 14 (2): 1–16. http://www.scopus.com/inward/record.url?eid=2-s2.0-84863525338&partnerID=40&md5=cc9d8b72b8b94a96ca05b675fccb4560.
Gerardi, Kristopher, Kyle Herkenhoff, Lee E. Ohanian, and Paul Willen. 2013. “Unemployment, Negative Equity, and Strategic Default.” http://papers.ssrn.com/abstract=2293152.
Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2011. “The Determinants of Attitudes Towards Strategic Default on Mortgages.” SSRN Electronic Journal (March 1). doi:10.2139/ssrn.1573328. http://papers.ssrn.com/abstract=1573328.
Riley, Sarah F. 2013. “Strategic Default Behavior and Attitudes Among Low-Income Homeowners” (February 1). http://papers.ssrn.com/abstract=2282518.
Seiler, M J. 2013. “The Role of Informational Uncertainty in the Decision to Strategically Default.” SSRN Electronic Journal (January 29). doi:10.2139/ssrn.2211933. http://papers.ssrn.com/abstract=2211933.
Seiler, M J, M A Lane, and D M Harrison. 2012. “Mimetic Herding Behavior and the Decision to Strategically Default.” Journal of Real Estate Finance and Economics. Old Dominion University, College of Business Administration, Norfolk, 23529-0223, United States. http://www.scopus.com/inward/record.url?eid=2-s2.0-84866282494&partnerID=40&md5=bd88e45d25c19dc9afd2a035c384852b.
Seiler, M J, V L Seiler, M A Lane, and D M Harrison. 2012. “Fear, Shame and Guilt: Economic and Behavioral Motivations for Strategic Default.” Real Estate Economics 40 (SUPPL. 1): S199–S233. http://www.scopus.com/inward/record.url?eid=2-s2.0-84871824267&partnerID=40&md5=cc8149feb524d374946f70929bc874fa.
Seiler, Michael Joseph, Eric A. Walden, and Mark Lane. 2012. “Strategic Mortgage Default and the Decision to Follow the Herd: A Neurological Explanation.” SSRN Electronic Journal (December 27). doi:10.2139/ssrn.2194254. http://papers.ssrn.com/abstract=2194254.
White, Brent T. 2010a. “Take This House and Shove It: The Emotional Drivers of Strategic Default.” SSRN Electronic Journal (May 14). doi:10.2139/ssrn.1603605. http://papers.ssrn.com/abstract=1603605.
———. 2010b. “The Morality of Strategic Default.” SSRN Electronic Journal (May 22). doi:10.2139/ssrn.1597835. http://papers.ssrn.com/abstract=1597835.
———. 2010c. “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” SSRN Electronic Journal (October 27). doi:10.2139/ssrn.1494467. http://papers.ssrn.com/abstract=1494467.
Wilkinson-Ryan, T. 2011. “Breaching the Mortgage Contract: The Behavioral Economics of Strategic Default.” Vanderbilt Law Review 64 (5): 1547–1583. http://www.scopus.com/inward/record.url?eid=2-s2.0-81855184667&partnerID=40&md5=4546d2ad8953dfd098aacad6d2fadffc.