The Effect of Perceived Lender Characteristics and Market Conditions on Strategic Mortgage Defaults
- Michael J. Seiler
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Inequity Aversion has long been applied in a game theoretic setting to explain that individuals are willing to sacrifice personal wealth in order to financially penalize players they perceive to be acting selfishly or unfairly. I apply inequity aversion to strategic mortgage default decisions and find that individual homeowners (as well as a second sample of professional mortgage lenders) have a differential stated willingness to walk away from their mortgage based on the perceived characteristics of their lender. Importantly, these significant differences can be removed even with extremely modest loan modifications. Finally, I document that regular homeowners and even professional lenders do a poor job differentiating between the owner of their loan and the servicer of their loan. This is particularly troubling given the extreme misconception of their bank’s true character. As a result, much of their willingness to penalize is misplaced resulting in an unnecessary number of strategic mortgage defaults.
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- The Effect of Perceived Lender Characteristics and Market Conditions on Strategic Mortgage Defaults
The Journal of Real Estate Finance and Economics
Volume 48, Issue 2 , pp 256-270
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Strategic mortgage default
- Loan modifications
- Inequity aversion
- Lender characteristics
- Industry Sectors
- Author Affiliations
- 1. Real Estate and Economic Development, Old Dominion University, 2154 Constant Hall, Norfolk, VA, 23529-0223, USA