Contagion Effects in Strategic Mortgage Defaults

43 Pages Posted: 7 Mar 2013

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

ICI

Date Written: January 25, 2013

Abstract

Using a large sample of U.S. mortgages, we document contagion effects in strategic mortgage defaults. These result from borrowers choosing to exercise their in the money default option. Our findings suggest this choice is influenced by the delinquency rate in surrounding zip codes after controlling for determinants of mortgage default. The fact that the local area delinquency rate is an important factor for strategic defaulters but not for defaults that are the result of inability to pay supports the contagion hypothesis. Our estimates suggest a 1% increase in the delinquency rate increases the probability of a strategic default up to 16.5%.

Keywords: Foreclosure contagion, strategic defaults, mortagages, underwater homes

JEL Classification: G21, D83

Suggested Citation

Goodstein, Ryan and Hanouna, Paul E. and Ramirez, Carlos D. and Stahel, Christof W., Contagion Effects in Strategic Mortgage Defaults (January 25, 2013). GMU Working Paper in Economics No. 13-07, Available at SSRN: https://ssrn.com/abstract=2229054 or http://dx.doi.org/10.2139/ssrn.2229054

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)

ICI ( email )

1401 H St NW
DC District Of Columbia 20005
United States

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