Paul Hanouna

Are Foreclosures Contagious

Using a large sample of U.S. mortgages observed over the 2005-2009 period, we find that foreclosures 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.

Contagion Effects in Strategic Mortgage Defaults

Using a large sample of U.S. mortgages observed over the 2005–2009 period, we document contagion effects in strategic mortgage defaults. Strategic defaults result from borrowers choosing to exercise their in the money default option and our findings suggest this choice is influenced by the delinquency rate in surrounding zip codes (within a 5 mile radius), after controlling for other known determinants of mortgage default. These controls include a large array of borrower and loan characteristics, local demographic and economic conditions, spatial correlations, and changes in property values. Our findings that the local area delinquency rate is an important factor for strategic defaulters (borrowers that can be influenced in their decision) but not for defaults that are the result of inability to pay (borrowers that had no choice) lend support the contagion hypothesis. Our estimates suggest that a 1% increase in the local area delinquency rate may increase the probability of a strategic default by 7.25–16.5%.

Political Contributions and the Price of Credit Risk: Evidence from Credit Default Swaps

Firm political contributions are associated with lower credit default swap spreads for contributing firms. To address endogeneity, we employ novel instruments and use a set of exogenous events on campaign contribution restrictions: (a) the passage of the Bipartisan Campaign Reform Act (BCRA) that banned soft money contributions, (b) the Federal Election Commission decision to interpret the BCRA less strictly, (c) the partial reversal of the BCRA and, (d) the McConnell v. FEC Supreme Court decision, which upheld the BCRA. Overall, the evidence suggests that political contributions are valued by credit market participants.