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Spillover effects in home mortgage defaults: Identifying the power neighbor

Souphala Chomsisengphet, Hua Kiefer and Xiaodong Liu ()

Regional Science and Urban Economics, 2018, vol. 73, issue C, 68-82

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.

Keywords: Discrete choices; Key player analysis; Mortgage defaults; Spatial networks; Rational expectations (search for similar items in EconPapers)
JEL-codes: C31 R31 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.regsciurbeco.2018.07.011

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