Thy Neighbor’s Mortgage: Does Living in a Subprime Neighborhood Affect One’s Probability of Default?
Article first published online: 30 JUN 2011
© 2011 American Real Estate and Urban Economics Association
Real Estate Economics
Volume 40, Issue 1, pages 1–22, Spring 2012
How to Cite
Agarwal, S., Ambrose, B. W., Chomsisengphet, S. and Sanders, A. B. (2012), Thy Neighbor’s Mortgage: Does Living in a Subprime Neighborhood Affect One’s Probability of Default?. Real Estate Economics, 40: 1–22. doi: 10.1111/j.1540-6229.2011.00311.x
- Issue published online: 20 FEB 2012
- Article first published online: 30 JUN 2011
This article 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 adjustable rate mortgages 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.