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Strategic Mortgage Default: The Effect of Neighborhood Factors
Author(s) -
Bradley Michael G.,
Cutts Amy Crews,
Liu Wei
Publication year - 2015
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.12081
Subject(s) - default , equity (law) , foreclosure , externality , debt , economics , position (finance) , home equity , synthetic cdo , finance , business , microeconomics , credit risk , political science , credit valuation adjustment , law , credit reference
This article studies strategic default—the willingness of a borrower to walk away from a mortgage when the value of the home falls below the unpaid principal balance despite an ability to pay. This study differs from the literature in two fundamental ways. First, we use unique data assets describing the household's equity position and capacity to carry the debt in addition to credit performance to identify strategic defaulters accurately. Second, we address externalities from local foreclosures and other strategic defaults and find that the incidence of strategic default is sensitive to the presence of other nearby strategic defaulters. These results have significant implications for foreclosure and loss mitigation policies employed by servicers and investors.