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New Study by ODU’s Seiler Explores Neurological Response of Homeowners in Connection to Decision to Default on Mortgage

Old Dominion University's Michael Seiler, founder and director of the Institute for Behavioral and Experimental Real Estate (IBERE), has released a new study that looks at how decisions to walk away from a mortgage appear on a scan of the brain.

Seiler's study, which builds on his cutting-edge research into strategic mortgage default (homeowners making the decision to walk away from a mortgage they can actually afford to pay), demonstrates that different factors affecting strategic default activate different portions of the brain.

"The purpose of this current investigation is to go even deeper to understand both the economic and behavioral motivations for strategic mortgage default at a neurological level," said Seiler, a professor of finance in the College of Business and Public Administration. "Specifically, what neurological substrates (areas in the brain) are associated with the various aspects of the decision to strategically default on a mortgage?"

Seiler tested a sample of homeowners from a mid-sized southwestern city U.S. using functional magnetic resonance imaging (fMRI) technology. The homeowners were posed a number of different scenarios about the notion of strategically defaulting on their mortgage, and asked to indicate their likelihood to do so, all while being examined neurologically by fMRI.

The current investigation is the first in the world to use fMRI technology, or any type of neurological investigatory tool, to gain a deeper understanding of the emotional and behavioral aspects of the decision to strategically default, both in isolation, and when deciding whether to follow the herd either toward or away from exercising this high-stakes option.

"Functional magnetic resonance imaging studies are particularly relevant when attempting to understand processes that occur on a subconscious level or any other process where hidden emotions are not easily accessed through introspection," Seiler said.

The findings indicate that different parts of the brain are activated by different aspects of strategic default. "We identify several neural substrates within the brain that realize significantly greater activity when differentiating between a number of different strategic default conditions," Seiler said.

The research links the left interior parietal lobe to the concept of herding in participants (their willingness to follow the pack with strategic default decisions, particularly when advised by an expert or "maven"). According to the findings, homeowners only significantly follow the herd when mavens advocate strategic default, not when they recommend against it.

In trials where homeowners are severely underwater, meaning they owe significantly more on their mortgage than the property is worth, the motor cortex and anterior cingulate cortex - the brain region particularly sensitive to situations where behavior may produce errors - show significantly more activation.

Moreover, when faced with loan parameters that entice homeowners to indicate a willingness to strategically default, subjects show significant activation of their left lingual gyrus and motor cortex, suggesting a greater level of self-reflection during the decision.

Ideally, Seiler said the fMRI data would be used in concert with traditional empirical methods to understand complex decision-making processes such as the ones studied in this investigation.

Seiler's groundbreaking studies, with ODU researchers and collaborators at other universities, have looked at the role human behavior plays in the epidemic of strategic default that has accompanied the current housing crisis, particularly in the hardest-hit areas.

ODU's Institute for Behavioral and Experimental Real Estate seeks to be the leading behavioral and experimental research organization in the world that looks at the flaws and biases in human decision making in the real estate field. Its purpose is to help real estate professionals and local and national governments find solutions to current issues and questions in real estate markets, through innovative research findings.

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