masthead.gif (15542 bytes)

Volume 35, Number 4, 2013

Strategic Mortgage Default in the Context of a Social Network

Michael J. Seiler
Professor and Robert M. Stanton Chair of Real Estate and Economic Development
Founder and Director, Institute for Behavioral and Experimental Real Estate (IBERE)
Old Dominion University
2154 Constant Hall
Norfolk, VA 23529-0223

Andrew J. Collins
Virginia Modeling, Analysis, and Simulation Center (VMASC)
Old Dominion University
Norfolk, VA 23529-0223

Nina H. Fefferman
Department of Ecology, Evolution, and Natural Resources
Rutgers University
Cook Campus; ENR building #134
14 College Farm Road
New Brunswick, NJ, 08901




A serious and imminent threat to a recovery of the global recession comes in the form of a burgeoning financial contagion known as strategic mortgage default. We theorize that the advocacy of strategic default can be likened to a disease, and as such, we employ a methodology from the field of epidemiology to measure how quickly this disease can spread throughout a society. We find that in our current fragile market, advice by influential Mavens for underwater homeowners to exercise their put option could result in a flood of strategic defaults causing a contagious downward spiral of residential real estate prices. Asymmetrically, when Mavens recommend homeowners not default, their ability to save a failing market is far more limited.

down1.gif (981 bytes)