Thy Neighbor's Mortgage: Does Living in a Subprime Neighborhood Impact Your Probability of Default?

31 Pages Posted: 21 Apr 2010

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Anthony B. Sanders

George Mason University - School of Business

Date Written: April 21, 2010

Abstract

This paper focuses on the potential externalities associated with subprime mortgage origination activity. Specifically, we examine whether negative spillover effects from subprime mortgage originations result in higher default rates in the surrounding area. Our empirical analysis controls for loan characteristics, house price changes, and alternative loan products. Our results indicate that after controlling for these characteristics, the concentration of subprime lending in a neighborhood does not lead to greater default risks for surrounding borrowers. However, we do find that more aggressive mortgage products (such as hybrid-ARMs and low/no documentation loans) had significant negative spillovers on other borrowers. Stated differently, the aggressive alternative mortgage designs were more toxic to the housing and mortgage market than previously believed.

Keywords: Subprime mortgages, default, house price appreciation, Externalities

JEL Classification: D1, G2, R1, R2

Suggested Citation

Agarwal, Sumit and Ambrose, Brent W. and Chomsisengphet, Souphala and Sanders, Anthony Bown, Thy Neighbor's Mortgage: Does Living in a Subprime Neighborhood Impact Your Probability of Default? (April 21, 2010). Available at SSRN: https://ssrn.com/abstract=1593734 or http://dx.doi.org/10.2139/ssrn.1593734

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Anthony Bown Sanders

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

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