‘Strategic Defaults’ are Contagious in This Foreclosure Crisis, Study Says

Falling home prices, the prospect of being “underwater” for years and advice from certain pundits or “mavens” have encouraged some homeowners to stop paying their mortgages despite their ability to make the payments, with damaging consequences to already foreclosure-ridden housing markets, according to a study released by the Mortgage Bankers Association.
These so-called strategic defaults, or “walking away” from a mortgage to gain a financial advantage, can be “contagious,” spread by housing market or financial pundits on television or online or by others through social networks.
This type of dissemination can lead to a housing market collapse in the most vulnerable regions, the study said.
“They can greatly impact mortgage markets through their use of behavioral advocacy,” said Michael J. Seiler, one of the study’s authors. “In fragile markets, advice by those considered to be experts can result in a flood of strategic defaults, causing a contagious downward spiral of home prices and potentially a market collapse.”
The study is entitled “Strategic Default in the Context of a Social Network: An Epidemiological Approach” and is authored by Seiler, of Old Dominion University; Andrew J. Collins, of the Virginia Modeling, Analysis and Simulation Center; and Nina H. Fefferman of Rutgers University. The MBA’s Research Institute for Housing America (RIHA) sponsored the study.
To access a copy of the report, visit the RIHA website at www.housingamerica.org.
The study focuses on the factors that distinguish an “economic default” caused by financial hardship from a “strategic default,” an option for homeowners who may be underwater on their mortgage. It also covers the methods by which an idea such as strategic default can be transmitted through communities by contact with individuals and through social networks.
The study found that widespread advice on strategically defaulting on a mortgage could have serious repercussions.
“This research illuminates the consequences of strategic defaults on housing markets, finding that they can be destabilizing, particularly in markets that are already on the edge,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “From a policy standpoint, the research supports the contention that opinion and information (or disinformation) can move markets. More specifically, that policymakers and Mavens have the ability to stabilize or de-stabilize markets.”