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

Lijia Mo and James Yae

Applied Economics, 2022, vol. 54, issue 35, 4101-4112

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.

Date: 2022
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DOI: 10.1080/00036846.2021.2022089

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