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Spillover effects in home mortgage defaults: Identifying the power neighbor

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  • Chomsisengphet, Souphala
  • Kiefer, Hua
  • Liu, Xiaodong

Abstract

This paper investigates spillover effects of mortgage defaults in the neighborhood on a homeowner's default decision. Following the interactions-based model of discrete choices in Lee et al. (2014), we explicitly model a homeowner's default decision as a function of predetermined risk factors as well as rational expectations on her neighbors' default decisions and find strong empirical evidence of spillover effects — in forms of time-lagged “contagion effects” and contemporaneous “multiplier effects”. Furthermore, the estimated model can be used to identify the “power neighbor” through whom a foreclosure prevention policy can generate the largest impact on a neighborhood. Compared to other homeowners, the “power neighbor” on average has less neighbors that defaulted in the past, a less risky loan, a smaller payment size, a higher credit score, and a more central location in the neighborhood.

Suggested Citation

  • Chomsisengphet, Souphala & Kiefer, Hua & Liu, Xiaodong, 2018. "Spillover effects in home mortgage defaults: Identifying the power neighbor," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 68-82.
  • Handle: RePEc:eee:regeco:v:73:y:2018:i:c:p:68-82
    DOI: 10.1016/j.regsciurbeco.2018.07.011
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    More about this item

    Keywords

    Discrete choices; Key player analysis; Mortgage defaults; Spatial networks; Rational expectations;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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