The Impact of Crime Rates on Residential Mortgage Default

Abstract

Although crime rates have long been thought to influence residential housing prices, no previous study has measured the effect of crime rates on rates of default on residential mortgages. Using a standard model of default in which crime rates can affect both the value of property and the liquidity of mortgageholders this paper empirically measures the effect of state--level crime on the frequency of residential mortgage default. Specifically, regression analysis, based on FBI data on both violent and property crime rates, is used to analyze default rates over a pooled sample of residential mortgages for all U.S. states and the District of Columbia during a 14--year period (1981-94).It is found that crime, possibly acting as a proxy for more general socioeconomic neighborhood deterioration, significantly affects the rate of mortgage default. This effect, somewhat surprisingly, is most important for conventional mortgage loans. Violent crime has a more delayed impact than does property crime in increasing defaults. Other factors which are found to strongly influence default are state--level personal income growth and state unemployment rates. These results support the assertion that the economic costs of crime are more pervasive and subtle than often discussed.

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JEL Classification: G13, G21, R21