TY - JOUR AU - Guiso,Luigi AU - Sapienza,Paola AU - Zingales,Luigi TI - Moral and Social Constraints to Strategic Default on Mortgages JF - National Bureau of Economic Research Working Paper Series VL - No. 15145 PY - 2009 Y2 - July 2009 UR - http://www.nber.org/papers/w15145 L1 - http://www.nber.org/papers/w15145.pdf N1 - Author contact info: Luigi Guiso European University Institute Economics Department Villa San Paolo 50133 Florence ITALY Fax: 39-055-4685-902 E-Mail: luigi.guiso@eui.eu Paola Sapienza Kellogg School of Management Northwestern University 2001 Sheridan Road, Evanston, IL 60208 Tel: 847/491-7436 Fax: 847/491-5719 E-Mail: paola-sapienza@northwestern.edu Luigi Zingales Booth School of Business The University of Chicago 5807 S. Woodlawn Avenue Chicago, IL 60637 Tel: 773/702-3196 Fax: 773/834-2081 E-Mail: luigi.zingales@ChicagoBooth.edu AB - We 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). We find that 26% of the existing defaults are strategic. We 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. Ceteris paribus, people who consider it immoral to default are 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so. The willingness to default increases nonlinearly with the proportion of foreclosures in the same ZIP code. That moral attitudes toward default do not change with the percentage of foreclosures in the area suggests that the correlation between willingness to default and percentage of foreclosures is likely to derive from a contagion effect that reduces the social stigma associated with default as defaults become more common. ER -