Understanding the Far-Reaching Societal Impact of Strategic Mortgage Default

AbstractIn this article, the often overlooked ramifications of strategic mortgage default and the widespread implications it has on our sense of community, economic, and financial stability, as well as mental and physical well-being are discussed. Too often studies examine only the one-off economic effects of strategic default, or more broadly, the foreclosure contagion effect. But, recent work in the mainstream finance literature indicates that larger picture issues such as national healthcare costs are also substantially impacted by major market movements like the recent housing bubble in the United States.The recent global financial crisis is rightfully the most popular theme in studies published in academic and practitioner journals in recent years. Every topic from the need to reform to conducting financial forensic autopsies populates journals across the globe. Since the global financial crisis began in the United States as a housing crisis, it bears reporting additional residential real estate accounts. In this article, I briefly review the macro real estate topics that have been discussed and reveal the extreme lack of discussion of the micro-level considerations that continue to drive the crisis today. More importantly, the lingering problems that are ongoing today are having, and will continue to have, a significant negative impact on a wide variety of topics that will cost our society on a number of fronts.In this paper, I discuss the burgeoning behavioral concept of strategic mortgage default. Strategic default occurs when a borrower is financially able, but is unwilling to pay his mortgage. This differs from an economic default where a borrower is financially unable to pay his mortgage. Numerous studies have documented that instances of strategic mortgage default are on the rise (Wyman, 2010; Bridgeman, 2011; FICO, 2011; Guiso, Sapienza, and Zingales, 2013). Seiler, Seiler, Lane, and Harrison (2012) document the economic and emotional drivers of strategic default, but no one has extended this work to discuss the ramifications these drivers have beyond the decision to default. I take the first step in this article.In the mainstream finance literature, Engelberg and Parsons (2014) use daily hospital admissions records across the state of California to argue that when the stock market performs badly, hospital admissions spike within 24 hours to treat a wide variety of stress-related illnesses. Sadly, the converse is not true. If the stock market fully rebounds, these same people do not see their health immediately improve to their prior state. In fact, hospital admissions do not fall at all. This finding that daily fluctuations in the stock market cause asymmetric damage to the health (and therefore wealth) of U.S. citizens speaks to the importance of financial stability to the current social and future financial well-being of society. Although the authors admit their estimates are quite fuzzy, Engelberg and Parsons (2014) estimate that fluctuations in the stock market cost California residents $77 million a year. This is a staggering cost even before extrapolating this number to the entire population of the U.S. (which comes to around $650 million per annum).What's even more disturbing about Engelberg and Parsons' (2014) study is that they only measure illnesses requiring hospitalization. How many days were taken off work by employees who became ill (but not ill enough to be hospitalized)? How many people pay money to see psychiatrists or psychological counselors for currently more mild conditions (which might well require hospitalization in the future)? Stress, in its many forms, has been definitely linked to a wide variety of diseases and disorders, far too numerous to list here. So while it will never be possible to accurately measure, it is easy to accept that there is a tremendous societal cost to financial instability.A QUICK HISTORY LESSONMost people think of a strategic defaulter as a selfish, greedy individual who engaged in a real estate gamble, lost, and now simply does not want to pay. …