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Contagion effects in strategic mortgage defaults

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  • Goodstein, Ryan
  • Hanouna, Paul
  • Ramirez, Carlos D.
  • Stahel, Christof W.

Abstract

Using a large sample of U.S. mortgages observed over the 2005–2009 period, we document contagion effects in strategic mortgage defaults. Strategic defaults result from borrowers choosing to exercise their in the money default option and our findings suggest this choice is influenced by the delinquency rate in surrounding zip codes (within a 5 mile radius), after controlling for other known determinants of mortgage default. These controls include a large array of borrower and loan characteristics, local demographic and economic conditions, spatial correlations, and changes in property values. Our findings that the local area delinquency rate is an important factor for strategic defaulters (borrowers that can be influenced in their decision) but not for defaults that are the result of inability to pay (borrowers that had no choice) lend support the contagion hypothesis. Our estimates suggest that a 1% increase in the local area delinquency rate may increase the probability of a strategic default by 7.25–16.5%.

Suggested Citation

  • Goodstein, Ryan & Hanouna, Paul & Ramirez, Carlos D. & Stahel, Christof W., 2017. "Contagion effects in strategic mortgage defaults," Journal of Financial Intermediation, Elsevier, vol. 30(C), pages 50-60.
    • Handle: RePEc:eee:jfinin:v:30:y:2017:i:c:p:50-60
    DOI: 10.1016/j.jfi.2016.10.001
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    2. Justin Sirignano & Apaar Sadhwani & Kay Giesecke, 2016. "Deep Learning for Mortgage Risk," Papers 1607.02470, arXiv.org, revised Mar 2018.
    3. Justin Sirignano & Kay Giesecke, 2019. "Risk Analysis for Large Pools of Loans," Management Science, INFORMS, vol. 65(1), pages 107-121, January.
    4. Stanga, Irina & Vlahu, Razvan & de Haan, Jakob, 2020. "Mortgage arrears, regulation and institutions: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 118(C).
    5. Peter Simmons & Nongnuch Tantisantiwong, 2018. "Evaluation of Individual and Group Lending under Asymmetric information," Discussion Papers 18/01, Department of Economics, University of York.
    6. Alin Marius Andries & Anca Copaciu & Radu Popa & Razvan Vlahu, 2021. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," Working Papers 727, DNB.
    7. Gerardo Pérez‐Cavazos, 2019. "Consequences of Debt Forgiveness: Strategic Default Contagion and Lender Learning," Journal of Accounting Research, Wiley Blackwell, vol. 57(3), pages 797-841, June.
    8. Ali-Rind, Asad & Boubaker, Sabri & Jarjir, Souad Lajili, 2023. "Peer effects in financial economics: A literature survey," Research in International Business and Finance, Elsevier, vol. 64(C).
    9. Lukasz A. Drozd & Ricardo Serrano-Padial, 2017. "Credit Enforcement Cycles," Working Papers 17-27, Federal Reserve Bank of Philadelphia.
    10. Calabrese, Raffaella & Crook, Jonathan, 2020. "Spatial contagion in mortgage defaults: A spatial dynamic survival model with time and space varying coefficients," European Journal of Operational Research, Elsevier, vol. 287(2), pages 749-761.
    11. Victor Medina-Olivares & Finn Lindgren & Raffaella Calabrese & Jonathan Crook, 2023. "Joint model for longitudinal and spatio-temporal survival data," Papers 2311.04008, arXiv.org.
    12. Pavan, Marina & Barreda-Tarrazona, Iván, 2020. "Should I default on my mortgage even if I can pay? Experimental evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    13. Clark, Brian & Hasan, Iftekhar & Lai, Helen & Li, Feng & Siddique, Akhtar, 2021. "Consumer defaults and social capital⋆," Journal of Financial Stability, Elsevier, vol. 53(C).
    14. Stanga, Irina & Vlahu, Razvan & de Haan, Jakob, 2020. "Mortgage arrears, regulation and institutions: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 118(C).
    15. Mitrašević, Mirela & Bardarova, Snezana, 2020. "Causes Of Non-Payment Of Mortgage Loans: Theoretical And Practical Aspects," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 11(2), pages 138-150.
    16. Peter J. Simmons & Nongnuch Tantisantiwong, 2022. "The Socially Optimal Loan Auditing with Multiple Projects," Discussion Papers 22/07, Department of Economics, University of York.

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