Foreclosure Spillovers within broad Neighborhoods

Abstract

Most evidence on foreclosure spillovers identifies localized effects that are modest in magnitude, but these effects could multiply to larger aggregate effects across broad neighborhoods. We test this proposition developing a proxy for the fraction of mortgages in negative equity during the foreclosure crisis and estimating a difference-in-differences model for foreclosure. This proxy exploits the timing of foreclosures in each tract, and this within tract variation is not predicted by mortgage attributes, housing attributes or sales prices. Our estimates suggest that 61 percent of the increase in across tract dispersion in foreclosure filings can be explained by these spillover effects.

High Cost Lenders and the Geographic Concentration of Foreclosures

“…9 Rather, our findings must be driven by broader spatial effects, possibly aggregate effects of the localized spillovers identified in earlier studies (e.g. Campbell et al, 2011;Gerardi et al, 2015;Gupta, 2016;Munroe and Wilse-Samson, 2013) or broader spillovers that were excluded by the identification strategies used in those papers (Huang, Nelson and Ross 2018).…”

“…Similarly, our findings provide new evidence that servicer behavior, possibly in response to local foreclosure experiences, contributed to high levels of dispersion in foreclosure rates over space. The potentially large aggregate impacts of neighborhood foreclosure spillovers (Mian, Sufi and Trebbi 2015;Huang, Nelson and Ross 2018;Gupta 2019;Guren and McQuade 2020) imply that such geographic concentrations of foreclosure are costly, and large racial and income differences in exposure to subprime and high risk lenders suggests large equity impacts, as well.…”

“…those spillover estimates arise from close proximity to a foreclosure (often within 250 feet) and tend to be small in magnitude, a few recent papers suggest that these spillovers could have had larger aggregate impacts (Mian, Sufi and Trebbi 2015;Huang, Nelson and Ross 2018;Gupta 2019;Guren and McQuade 2020).…”