Foreclosure contagion and the neighborhood spillover effects of mortgage defaults

Abstract

In this paper, I identify shocks to interest rates resulting from two administrative details in adjustable-rate mortgage contract terms: the choice of financial index and the choice of lookback period. I find that a 1 percentage point increase in interest rate at the time of adjustable-rate mortgage (ARM) reset results in a 2.5 percentage increase in the probability of foreclosure in the following year, and that each foreclosure filing leads to an additional 0.3 to 0.6 completed foreclosures within a 0.10-mile radius. In explaining this result, I emphasize price effects, bank-supply responses, and borrower responses arising from peer effects.

Keywords

Tags of Social Finance