Papers - Framed

David M Harrison, Mark A. Lane, Michael J. Seiler

Cited by*: 4 Downloads*: 0

This study examines the herding behavior of individuals in the context of their willingness to strategically default on a mortgage based on the (falsely) observed behavior of those around them. We find that homeowners are easily persuaded to follow the herd and adopt a strategic default proclivity consistent with that of their peers. Herding behavior is stronger when a Maven, or thought leader, is involved and weaker when the person finds strategic default to be morally objectionable. Homeowners appear to herd more for informational gains rather than for social reasons, and do not herd differentially based on signal strength. In a robustness check using a sample of real estate professionals, the strong mimetic herding result continues to hold.

Michael J. Seiler

Cited by*: 0 Downloads*: 0

Defaulting on a mortgage is widely viewed as being immoral, but no prior study has examined the intervening roles of financial outcome and default intent. We find that the public is significantly more accepting of a defaulting borrower who earns a zero or negative return on his investment than one who earns a positive return. This moral viewpoint changes significantly when the default is strategic in nature. Defaulters are judged significantly less harshly by those who more so blame the lender for the current financial crisis, those who have previously strategically defaulted, and males. When asked to suggest a "morally appropriate" settlement offer to lenders to resolve the distressed debt, beyond the financial outcome and default intent remaining significant, we further find that those who more so blame the lender, those view their home as more of an investment rather than a consumption good, those who have previously strategically defaulted, those with lower income levels, and minorities suggest significantly lower settlement offers.

Michael J. Seiler

Cited by*: 2 Downloads*: 0

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 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 ideal.

John A List

Cited by*: 12 Downloads*: 0

n/a

James Andreoni, John A List

Cited by*: 0 Downloads*: 0

No abstract available