The Effect of Neighborhood Contagion on Mortgage Selection

Abstract

In this paper we analyze how spillovers in mortgage adoption affect mortgage product choice across neighborhoods and across borrowers of different racial or ethnic groups. We use loan-level data on subprime mortgages for metropolitan areas in California and Florida during 2004 and 2005, the peak years of the subprime mortgage boom. We identify an important and statistically significant effect of spillovers, both within and across groups, on the consumers' choice of hybrid mortgage products that were popular during this period. In particular, we find that the group-specific spillover effects are strengthened by the group affiliation (race and ethnicity) of the borrower. The effects are particularly important among Hispanic and white borrowers, but not among black borrowers.