Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2011-4
Are Foreclosures Contagious?
February 2011
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2011-4
Are Foreclosures Contagious?
February 2011
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Are Foreclosures Contagious? I
Ryan M. Goodsteina, Paul Hanounab,e, Carlos D. Ramirezc,e, Christof W. Staheld,e,∗
a Division of Insurance and Research, Federal Deposit Insurance Corporation
b Department of Finance, Villanova University
c Department of Economics, George Mason University
d Department of Finance, George Mason University
e Center for Financial Research, Federal Deposit Insurance Corporation
Abstract
Using a large sample of U.S. mortgages observed over the 2005-2009 period, we find that foreclo-
sures 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
IWe would like to thank, without implicating, Sanjiv Das, Enrica Detragiache, James Einloth,
Paul Kupiec, Myron Kwast, Haluk ̈Unal and Erlend Nier, as well as seminar participants at the MCM
seminar at the International Monetary Fund and the FDIC for helpful comments and suggestions.
We gratefully acknowledge financial and logistical support from the Center for Financial Research
at the FDIC. The views expressed in this paper do not necessarily reflect those of the Federal Deposit
Insurance Corporation.
∗Corresponding Author
Email addresses: rgoodstein@fdic.gov (Ryan M. Goodstein),
paul.hanouna@villanova.edu (Paul Hanouna), cramire2@gmu.edu (Carlos D. Ramirez),
cstahel@gmu.edu (Christof W. Stahel)
January 19, 2011
Ryan M. Goodsteina, Paul Hanounab,e, Carlos D. Ramirezc,e, Christof W. Staheld,e,∗
a Division of Insurance and Research, Federal Deposit Insurance Corporation
b Department of Finance, Villanova University
c Department of Economics, George Mason University
d Department of Finance, George Mason University
e Center for Financial Research, Federal Deposit Insurance Corporation
Abstract
Using a large sample of U.S. mortgages observed over the 2005-2009 period, we find that foreclo-
sures 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
IWe would like to thank, without implicating, Sanjiv Das, Enrica Detragiache, James Einloth,
Paul Kupiec, Myron Kwast, Haluk ̈Unal and Erlend Nier, as well as seminar participants at the MCM
seminar at the International Monetary Fund and the FDIC for helpful comments and suggestions.
We gratefully acknowledge financial and logistical support from the Center for Financial Research
at the FDIC. The views expressed in this paper do not necessarily reflect those of the Federal Deposit
Insurance Corporation.
∗Corresponding Author
Email addresses: rgoodstein@fdic.gov (Ryan M. Goodstein),
paul.hanouna@villanova.edu (Paul Hanouna), cramire2@gmu.edu (Carlos D. Ramirez),
cstahel@gmu.edu (Christof W. Stahel)
January 19, 2011