Are Foreclosures Contagious?

34 Pages Posted: 19 Feb 2011

See all articles by Ryan Goodstein

Ryan Goodstein

FDIC Division of Depositor and Consumer Protection

Paul Hanouna

Villanova University - School of Business

Carlos D. Ramirez

George Mason University - Department of Economics

Christof W. Stahel

Investment Company Institute

Multiple version iconThere are 3 versions of this paper

Date Written: January 19, 2011

Abstract

Using a large sample of U.S. mortgages observed over the 2005-2009 period, we find that foreclosures are contagious. After controlling for major factors known to influence a borrower’s decision to default, including borrower and loan characteristics, local demographic and economic conditions, and changes in property values, the likelihood of a mortgage default increases by as much as 24% with a one standard deviation increase in the foreclosure rate of the borrower’s surrounding zip code. We find that foreclosure contagion is most prevalent among strategic defaulters: borrowers who are underwater on their mortgage but are not likely to be financially distressed. Taken together, the evidence supports the notion that foreclosures are contagious.

Keywords: Foreclosure, Contagion, Mortgages, Learning, Stigma

Suggested Citation

Goodstein, Ryan and Hanouna, Paul E. and Ramirez, Carlos D. and Stahel, Christof W., Are Foreclosures Contagious? (January 19, 2011). GMU Working Paper in Economics No. 11-12, Available at SSRN: https://ssrn.com/abstract=1764271 or http://dx.doi.org/10.2139/ssrn.1764271

Ryan Goodstein

FDIC Division of Depositor and Consumer Protection ( email )

550 17th Street, NW
Washington, DC 20429
United States

Paul E. Hanouna

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Carlos D. Ramirez

George Mason University - Department of Economics ( email )

4400 University Drive
Enterprise Hall MSN 3G4
Fairfax, VA 22030
United States
703-993-1130 (Phone)
703-993-1133 (Fax)

Christof W. Stahel (Contact Author)

Investment Company Institute ( email )

1401 H Street, NW
Washington, DC 20005
United States

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