The Effect of Foreclosures on Homeowners, Tenants, and Landlords

Rebecca Diamond, Adam Guren and Rose Tan

No 27358, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How costly is foreclosure? Estimates of the social cost of foreclosure typically focus on financial costs. Using random judge assignment instrumental variable (IV) and propensity score matching (PSM) approaches in Cook County, Illinois, we find evidence of significant non-pecuniary costs of foreclosure, particularly for foreclosed-upon homeowners. For all homeowners (IV and PSM), foreclosure causes housing instability, reduced homeownership, and financial distress. For marginal homeowners (IV) but not average homeowners (PSM), foreclosure also causes moves to worse neighborhoods and elevated divorce. We show that the difference between IV and PSM is due to treatment effect heterogeneity: marginal homeowners have more to lose than average homeowners. We find similar financial costs for landlords, although the non-financial effects we find for owners are absent. We find few negative effects for renters whose landlord forecloses. The contrast between our results for owners, renters, and landlords implies that the financial costs come from the financial loss while the non-financial costs for owners are due to a combination of eviction and financial loss rather than either individually. Our estimates imply that foreclosure is far more costly than current estimates imply, particularly for marginal cases that are most responsive to foreclosure mitigation policies, and that the costs are disproportionately borne by owners who lose their home.

JEL-codes: R21 R51 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ure
Note: CF PE
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Citations: View citations in EconPapers (21)

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Working Paper: The Effect of Foreclosures on Homeowners, Tenants, and Landlords (2020)
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