Walking Away From Your Home Is Contagious

By Daniel Indiviglio

"If my friend Joe is doing it, it can't be that bad, right?" That appears to be the attitude of Americans when it comes to defaulting on their mortgages. In an new survey by Fannie Mae, one of the more peculiar findings is that default appears to be contagious. Americans are far more willing to considering it as an option if they know someone else who has done it.

Here's the key chart with the results:

strategic default contagious 2010-08.png

This is admittedly a little hard to understand at first. So on the horizontal axis "No" and "Yes" answers the question whether the respondent has knowledge of people in the area who have defaulted on their mortgage. The two bars on the left consists of all respondents who have mortgages, while the one on the right is just the subset that is delinquent on their loan.

As you can see, if Americans know someone who has defaulted they are far more likely to consider doing the same. In the total mortgage borrower population, the magnitude changes from 2% to 7%. That might not sound like a lot, but that difference accounts for 3.5x as many people. And remember that this population is mostly borrowers who can afford to make their payments and are currently doing so. This would make them mostly strategic defaulters in the strict sense -- walking away by choice, not financial distress. But it seems that since defaulting has become so common, it is losing some of its social stigma.

For those who are already delinquent, the portion who would consider default is much larger. Then if the borrower knows someone who has defaulted, a whopping 40% would consider doing so themselves. If they don't know anyone who has, then even though they're already delinquent, only 21% see it as an option they would consider. Again, it's pretty clear that new societal norms are affecting borrower behavior here.

This data is pretty interesting, because it shows a hint of moral relativism. Obviously, determining whether or not to default isn't a purely financial decision. If it was, then knowing someone else who has done so wouldn't have a statistically significant effect on your decision. Morality must also enter the picture. Perhaps this should not be surprising. After all, if an action isn't taboo in your social circle, you're less likely to avoid it. This assertion apparently applies to walking away from your home as well.

This article available online at:

http://www.theatlantic.com/business/archive/2010/09/walking-away-from-your-home-is-contagious/63125/