Modeling Spatially Interdependent Mortgage Decisions

Abstract

House prices regression residuals often display spatial dependence, but historically mortgage models (which employ house prices) assume independence and use only the own borrower/loan characteristics. This manuscript uses a spatial probit model to investigate spatial dependence among the disturbances and the effect of borrower/loan characteristics from nearby properties on payment default. We find that spatial dependence in the disturbances has a large effect on model fit and that spillovers from risky mortgage characteristics have statistically significant and material effects on own payment default.

Keywords: mortgage, mortgage default, spatial probit, spillover, interdependent disturbances