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Lending Club meets Zillow: local housing prices and default risk of peer-to-peer loans

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  • Lijia Mo
  • James Yae

Abstract

We investigate the role of local housing prices in the default of peer-to-peer (P2P) loans. From the data of Lending Club and Zillow, we find that borrowers, who reside at a ZIP code where median home price is one standard deviation higher than the cross-sectional average, show a 0.75% lower default probability, given the loan interest rate into consideration. However, this effect of ZIP-code-level home price on the default probability is three times stronger for homeowner borrowers with mortgages: the marginal probability jumps from 0.75% to 2.13%. Higher home price improves a homeowner borrower’s credit and wealth, and such an effect is highly leveraged by a mortgage, ceteris paribus. This channel is an interaction between borrower-specific and local information, which is distinct from the well-known socio-economic channel. Our empirical results provide an important implication on the reputation or feedback mechanisms in P2P loan markets.

Suggested Citation

  • Lijia Mo & James Yae, 2022. "Lending Club meets Zillow: local housing prices and default risk of peer-to-peer loans," Applied Economics, Taylor & Francis Journals, vol. 54(35), pages 4101-4112, July.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:35:p:4101-4112
    DOI: 10.1080/00036846.2021.2022089
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    Cited by:

    1. Li, Aimin & Li, Zhiyong & Bellotti, Anthony, 2023. "Predicting loss given default of unsecured consumer loans with time-varying survival scores," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    2. Li, Zhiyong & Li, Aimin & Bellotti, Anthony & Yao, Xiao, 2023. "The profitability of online loans: A competing risks analysis on default and prepayment," European Journal of Operational Research, Elsevier, vol. 306(2), pages 968-985.

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