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The role of informational uncertainty in the decision to strategically default

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  • Michael J. Seiler

Abstract

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.

Suggested Citation

  • Michael J. Seiler, 2015. "The role of informational uncertainty in the decision to strategically default," Framed Field Experiments 00621, The Field Experiments Website.
    • Handle: RePEc:feb:framed:00621
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    1. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 1-17, January.
    2. Michael Seiler, 2014. "The Effect of Perceived Lender Characteristics and Market Conditions on Strategic Mortgage Defaults," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 256-270, February.
    3. David Harrison & Michael Seiler, 2015. "The Paradox of Judicial Foreclosure: Collateral Value Uncertainty and Mortgage Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 50(3), pages 377-411, April.
    4. Michael J. Seiler & Andrew J. Collins & Nina H. Fefferman, 2013. "Strategic Mortgage Default in the Context of a Social Network," Journal of Real Estate Research, American Real Estate Society, vol. 35(4), pages 445-476.
    5. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    6. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2013. "The Determinants of Attitudes toward Strategic Default on Mortgages," Journal of Finance, American Finance Association, vol. 68(4), pages 1473-1515, August.
    7. Lorenz, Edward, 1999. "Trust, Contract and Economic Cooperation," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 23(3), pages 301-315, May.
    8. Michael J. Seiler & Vicky L. Seiler & Mark A. Lane & David M. Harrison, 2012. "Fear, Shame and Guilt: Economic and Behavioral Motivations for Strategic Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40, pages 199-233, December.
    9. Michael Seiler & Mark Lane & David Harrison, 2014. "Mimetic Herding Behavior and the Decision to Strategically Default," The Journal of Real Estate Finance and Economics, Springer, vol. 49(4), pages 621-653, November.
    10. Marshall Gangel & Michael Seiler & Andrew Collins, 2013. "Exploring the Foreclosure Contagion Effect Using Agent-Based Modeling," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 339-354, February.
    11. William H. Rogers & William Winter, 2009. "The Impact of Foreclosures on Neighboring Housing Sales," Journal of Real Estate Research, American Real Estate Society, vol. 31(4), pages 455-480.
    12. Harding, John P. & Rosenblatt, Eric & Yao, Vincent W., 2009. "The contagion effect of foreclosed properties," Journal of Urban Economics, Elsevier, vol. 66(3), pages 164-178, November.
    13. Zhenguo Lin & Eric Rosenblatt & Vincent Yao, 2009. "Spillover Effects of Foreclosures on Neighborhood Property Values," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 387-407, May.
    14. Bicchieri,Cristina, 2006. "The Grammar of Society," Cambridge Books, Cambridge University Press, number 9780521574907.
    15. Tess Wilkinson‐Ryan & Jonathan Baron, 2009. "Moral Judgment and Moral Heuristics in Breach of Contract," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 6(2), pages 405-423, June.
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    Citations

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    Cited by:

    1. David M. Harrison & Kimberly F. Luchtenberg & Michael J. Seiler, 2023. "Improving Mortgage Default Collection Efforts by Employing the Decoy Effect," The Journal of Real Estate Finance and Economics, Springer, vol. 66(4), pages 840-860, May.
    2. Jackson T. Anderson & David M. Harrison & Kimberly F. Luchtenberg & Michael J. Seiler, 2023. "Legal Versus Psychological Contracts: When Does a Mortgage Default Settlement Contract Become a Contract?," The Journal of Real Estate Finance and Economics, Springer, vol. 67(2), pages 191-217, August.
    3. Hirota, Shinichi & Suzuki-Löffelholz, Kumi & Udagawa, Daisuke, 2020. "Does owners’ purchase price affect rent offered? Experimental evidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    4. Michael J. Seiler, 2017. "Do Liquidated Damages Clauses Affect Strategic Mortgage Default Morality? A Test of the Disjunctive Thesis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(1), pages 204-230, February.
    5. Michael LaCour-Little & Zhenguo Lin & Wei Yu, 2020. "Assumable Financing Redux: A New Challenge for Appraisal?," The Journal of Real Estate Finance and Economics, Springer, vol. 60(1), pages 3-39, February.
    6. Lin, Zhenguo & Liu, Yingchun & Xie, Jia, 2024. "Market distortions with collusion of agents," Journal of Banking & Finance, Elsevier, vol. 162(C).
    7. Kimberly F. Luchtenberg & Michael J. Seiler & Hua Sun, 2019. "Listing Agent Signals: Does a Picture Paint a Thousand Words?," The Journal of Real Estate Finance and Economics, Springer, vol. 59(4), pages 617-648, November.
    8. Jackson T. Anderson & David M. Harrison & Michael J. Seiler, 2022. "Reducing Strategic Forbearance under the CARES Act: an Experimental Approach Utilizing Recourse Attestation," The Journal of Real Estate Finance and Economics, Springer, vol. 65(2), pages 230-260, August.
    9. Xun Bian & Zhenguo Lin, 2022. "Housing debt and elderly housing tenure choices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(5), pages 1360-1397, September.
    10. Michael J. Seiler, 2016. "The Perceived Moral Reprehensibility of Strategic Mortgage Default," Framed Field Experiments 00622, The Field Experiments Website.

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    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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