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

Abstract

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 that homeowners not default, their ability to save a failing market is far more limited.