Strategic Default in the Context of a Social Network: An Epidemiological Approach

Title: Strategic Default in the Context of a Social Network: An Epidemiological Approach

Date: 11/14/2011

Author(s): Michael J. Seiler, Andrew J. Collins and Nina H. Fefferman

Executive Summary:

The real estate market is currently experiencing the worst crisis since the Great Depression. Unemployment has caused people to involuntarily default on their mortgages, while falling home prices have encouraged others to voluntarily stop paying their mortgages. While the total number of defaults can be measured with a high degree of precision, whether or not those defaults are due to an inability to pay or an unwillingness to pay is typically unobservable from market data. Before reaching a strategic default decision, borrowers must consider numerous federal and state-level laws. Each of these laws directly relates to the economic advantages and disadvantages associated with the choice to strategically default. Whether by choice or necessity, as foreclosures increase, they have an increasingly negative impact on the price of the healthy homes around them. One default does little to negatively impact the price of surrounding homes. However, as more and more mortgages in the neighborhood go into default, the negative impact is felt at an increasing rate. Much the same way as a disease spreads throughout a population, so too do decisions to "strategically" default.