Law Review: Towe & Hawley- The Contagion Effect of Neighboring Foreclosures

Abstract: This paper examines the contagion effect of residential foreclosures and finds strong evidence of a social interactions influence on default decisions where the interaction is based on neighbors' behavior in a previous period. Using a unique spatially explicit parcel level data set documenting residential foreclosures in Maryland for the years 2006-2009 and a highly localized neighborhood definition, based on 13 nearest neighbors, the authors find that a neighbor in foreclosure increases the hazard of additional defaults by as much as 28%. This feedback effect goes beyond a temporary reduction in local house prices and implies a negative social multiplier effect of foreclosures. Commentary: This paper presents a different perspective on the often over-hyped "moral hazard", by examining how the foreclosure of a neighbor's house can affect another homeowner's decisions regarding foreclosure, i.e. "the contagion effect". For a copy of the paper, see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1834805 For another paper on this same topic, see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1868589