Moral And Social Constraints To Strategic Default On Mortgages

The authors use survey data to study American households' propensity to default when the value of their mortgage exceeds the value of their house even if they can afford to pay their mortgage (strategic default). They find that 26% of the existing defaults are strategic. They also find that no household would default if the equity shortfall is less than 10% of the value of the house. Yet, 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house. Besides relocation costs, the most important variables in predicting strategic default are moral and social considerations.