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Epidemiological spreading of mortgage default

Author

Listed:
  • Schweikert, Jochen
  • Höchstötter, Markus

Abstract

This paper introduces mathematical models to capture the spreading of epidemics to explain the expansion of mortgage default events in the United States. Here we use the state of infectiousness and death to represent the subsequent steps of payment delinquency and default, respectively. Since the local economic structure influences regional unemployment that is a strong driver of mortgage default, we model interdependencies of regional mortgage default rates through employment conditions as well as vicinity. Based on a large sample between 2000 and 2014 of loan-level data, the estimation of key parameters of the model is proposed. The model's forecast accuracy shows an above average performance compared to well-known approaches like linear regression or logit models. The key findings may be useful in understanding the dynamics of mortgage defaults and its spatial spreading.

Suggested Citation

  • Schweikert, Jochen & Höchstötter, Markus, 2018. "Epidemiological spreading of mortgage default," Working Paper Series in Economics 112, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
  • Handle: RePEc:zbw:kitwps:112
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    References listed on IDEAS

    as
    1. Deng, Yongheng & Quigley, John M. & Van Order, Robert & Mac, Freddie, 1996. "Mortgage default and low downpayment loans: The costs of public subsidy," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 263-285, June.
    2. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2013. "The role of neighborhood characteristics in mortgage default risk: Evidence from New York City," Journal of Housing Economics, Elsevier, vol. 22(2), pages 100-118.
    3. Divino, Jose Angelo & Rocha, Líneke Clementino Sleegers, 2013. "Probability of default in collateralized credit operations," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 276-292.
    4. Floros, Ioannis & White, Joshua T., 2016. "Qualified residential mortgages and default risk," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 86-104.
    5. Stephan Weiler, 2001. "Unemployment in Regional Labor Markets: Using Structural Theories to Understand Local Jobless Rates in West Virginia," ILR Review, Cornell University, ILR School, vol. 54(3), pages 573-592, April.
    6. Miroslav Misina & David Tessier & Shubhasis Dey, 2006. "Stress Testing the Corporate Loans Portfolio of the Canadian Banking Sector," Staff Working Papers 06-47, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Mortgage default; Epidemics; Spatial spreading;
    All these keywords.

    JEL classification:

    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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    This paper has been announced in the following NEP Reports:

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