Consumer Ruthlessness and Mortgage Default During the 2007-2009 Housing Bust

Social Science Research Network

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Date Published 2011
Primary Author Neil Bhutta
Other Authors Jane Dokko, Hui Shan
Theme Rental Housing, Loan Origination, Servicing Foreclosure and Forbearance
Country United States


From 2007 to 2009 U.S. house prices plunged and mortgage defaults surged. While ostensibly consistent with widespread “ruthless default,” our analysis of detailed data on home prices and mortgage performance indicates that borrowers do not walk away until they are deeply underwater – far deeper than traditional models of ruthless behavior predict. Moral aversion to default may be driving this result since sample borrowers face low default costs along other dimensions. These results suggest that the moral hazard cost of default as a form of social insurance is lower than what many may suspect.

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