The Determinants of Attitudes towards Strategic Default on Mortgages
TL;DR: This article used survey data to measure households' propensity to default on mortgages even if they can afford to pay them (strategic default) when the value of the mortgage exceeds the values of the house and found that the willingness to default increases in both the absolute and the relative size of the home-equity shortfall.
Abstract: We use survey data to measure households’ propensity to default on mortgages even if they can afford to pay them (strategic default) when the value of the mortgage exceeds the value of the house. The willingness to default increases in both the absolute and the relative size of the home-equity shortfall. Our evidence suggests that this willingness is affected by both pecuniary and non-pecuniary factors, such as views about fairness and morality. We also find that exposure to other people who strategically defaulted increases the propensity to default strategically because it conveys information about the probability of being sued.
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TL;DR: This article found that borrowers who appear more trustworthy have higher probabilities of having their loans funded and default less often, while borrowers who appeared more trustworthy had better credit scores and defaulted less often.
Abstract: Although it is well known that appearance-based impressions affect labor market and election outcomes, little is known about the role appearance plays in financial transactions. We address this question using photographs of potential borrowers from a peer-to-peer lending site. Consistent with the trust-intensive nature of lending, we find that borrowers who appear more trustworthy have higher probabilities of having their loans funded. Moreover, borrowers who appear more trustworthy indeed have better credit scores and default less often. Overall, our findings suggest that impressions of trustworthiness matter in financial transactions as they predict investor, as well as borrower, behavior. A man I do not trust could not get money from me on all the bonds in Christendom. --John Pierpont Morgan, 1913 The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
771 citations
TL;DR: Benmelech et al. as mentioned in this paper survey the literature to understand how information type influences the continued evolution of financial markets and institutions and present the relative advantages of hard and soft information.
Abstract: Information, which can arrive in multiple forms, is a fundamental component of all financial transactions and markets We define hard and soft information and describe the relative advantages of each Hard information is quantitative, is easy to store, and can be transmitted in impersonal ways Its information content is independent of its collection As technology changes, the way we collect, process, and communicate information, it changes the structure of markets, the design of financial intermediaries, and the incentives to use or misuse information We survey the literature to understand how information type influences the continued evolution of financial markets and institutionsReceived October 25, 2016; editorial decision September 6, 2018 by Editor Efraim Benmelech
480 citations
TL;DR: In this article, the authors link administrative data to survey responses and behavior in incentivized experiments to understand why investors hold socially responsible mutual funds, and find that both social preferences and social signaling explain socially responsible investment (SRI) decisions.
Abstract: To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play less of a role. Socially responsible investors in our sample expect to earn lower returns on SRI funds than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.
439 citations
TL;DR: In this article, the authors quantify the effect of recourse on default and find that recourse affects default by lowering the borrower's sensitivity to negative equity, and that defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu, in states that allow deficiency judgments.
Abstract: We quantify the effect of recourse on default and find that recourse affects default by lowering the borrower's sensitivity to negative equity. At the mean value of the default option for defaulted loans, borrowers are 30% more likely to default in non-recourse states. Furthermore, for homes appraised at $500,000 to $750,000, borrowers are twice as likely to default in non-recourse states. We also find that defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu, in states that allow deficiency judgments. We find no evidence that mortgage interest rates are lower in recourse states. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
332 citations
TL;DR: A review of the evolution and most recent developments of household finance can be found in this article, with a focus on the normative and positive study of how households use financial markets to achieve their objectives.
Abstract: Household finance—the normative and positive study of how households use financial markets to achieve their objectives—has gained a lot of attention over the past decade and has become a field with its own identity, style, and agenda. In this chapter we review its evolution and most recent developments.
280 citations
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TL;DR: This paper showed that if some people care about equity, the puzzles can be resolved and that the economic environment determines whether the fair types or the selesh types dominate equilibrium behavior in cooperative games.
Abstract: There is strong evidence that people exploit their bargaining power in competitivemarkets butnot inbilateral bargainingsituations. Thereisalsostrong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet, when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selesh types dominate equilibrium behavior.
8,783 citations
TL;DR: The authors survey 392 CFOs about the cost of capital, capital budgeting, and capital structure and find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.
4,138 citations
TL;DR: The authors found that gender, age, height, and parental background have an economically significant impact on willingness to take risks, and the question about risk taking in general generates the best all-round predictor of risky behavior.
Abstract: This paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects’ homes. Using a question asking people about their willingness to take risks \"in general\", we find that gender, age, height, and parental background have an economically significant impact on willingness to take risks. The experiment confirms the behavioral validity of this measure, using paid lottery choices. Turning to other questions about risk attitudes in specific contexts, we find similar results on the determinants of risk attitudes, and also shed light on the deeper question of stability of risk attitudes across contexts. We conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks, occupational choice, and smoking. The question about risk taking in general generates the best all-round predictor of risky behavior.
2,539 citations
TL;DR: According to the social role theory of gender and helping as mentioned in this paper, the male gender role fosters helping that is heroic and chivalrous, whereas the female gender role fosterers helping behavior that is nurturant and caring.
Abstract: According to our social-role theory of gender and helping, the male gender role fosters helping that is heroic and chivalrous, whereas the female gender role fosters helping that is nurturant and caring. In social psychological studies, helping behavior has been examined in the context of short-term encounters with strangers. This focus has tended to exclude from the research literature those helping behaviors prescribed by the female gender role, because they are displayed primarily in long-term, close relationships. In contrast, the helping behaviors prescribed by the male gender role have been generously represented in research findings because they are displayed in relationships with strangers as well as in close relationships. Results from our meta-analytic review of sex differences in helping behavior indicate that in general men helped more than women and women received more help than men. Nevertheless, sex differences in helping were extremely inconsistent across studies and were successfully predicted by various attributes of the studies and the helping behaviors. These predictors were interpreted in terms of several aspects of our social-role theory of gender and helping.
2,069 citations
TL;DR: In this paper, the authors conduct a within-county analysis using detailed ZIP code-level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression, finding that the sharp increase in mortgage defaults in 2007 is significantly amplified in subprime ZIP codes, or ZIP codes with a disproportionately large share of subprime borrowers as of 1996.
Abstract: We conduct a within-county analysis using detailed ZIP code—level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The sharp increase in mortgage defaults in 2007 is significantly amplified in subprime ZIP codes, or ZIP codes with a disproportionately large share of subprime borrowers as of 1996. Prior to the default crisis, these subprime ZIP codes experience an unprecedented relative growth in mortgage credit. The expansion in mortgage credit from 2002 to 2005 to subprime ZIP codes occurs despite sharply declining relative (and in some cases absolute) income growth in these neighborhoods. In fact, 2002 to 2005 is the only period in the past eighteen years in which income and mortgage credit growth are negatively correlated. We show that the expansion in mortgage credit to subprime ZIP codes and its dissociation from income growth is closely correlated with the increase in securitization of subprime mortgages.
1,217 citations