Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
The Journal of Real Estate Finance and Economics
Published in: The Journal of Real Estate Finance and Economics 3/2022

10-07-2020

Social Capital and Mortgage Delinquency

Authors: Lingxiao Li, Erdem Ucar, Abdullah Yavas

Published in: The Journal of Real Estate Finance and Economics | Issue 3/2022

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

This study offers a simple theoretical model and empirical evidence to address the impact of social capital on mortgage delinquency. Social capital includes the norms, values, trust, and information common to a social network, which enable cooperative and shared actions. Using a new county-level dataset between 1999 and 2011 for the U.S, we find new evidence to show that social capital significantly affects the likelihood of mortgage delinquency. In particular, we find that a one-standard-deviation increase in social capital leads to a 0.13 standard deviation decrease in mortgage delinquency. The effect of social capital remains significant after controlling for location fixed effects and addressing endogeneity. The primary explanation is that social norms or trust could limit opportunistic behavior among homeowners and negatively affect strategic default activities. We also find that the impact of social capital on mortgage delinquency increased after the recent financial crisis. Furthermore, we show that the impact of social capital is more pronounced when the default is more likely to be strategic. Our findings have important implications for players in the mortgage industry and for policymakers in that cooperative and shared actions can play an important role in the mortgage default process. Thus, the assessment of default risk should consider social capital in addition to the factors already documented in the literature.
previous article Economic Fundamentals, Capital Expenditures and Asset Dispositions
next article Housing Prices, Yields and Credit Conditions in Dublin since 1945

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
Footnotes
1
It is Federal Reserve estimates based on data from the Mortgage Bankers Association.
 
2
Our sample covers a majority of the U.S. counties. It does not include all the counties due to data availability, which is discussed in more detail later in the paper. For example, mortgage delinquency information is not available for counties with a population less than 10,000. Moreover, the sample used in our empirical analysis covers the period of 1999–2011 due to data availability. Our mortgage delinquency data is available for the period of 1999–2011. More details on the data is provided later in the paper.
 
3
We use interpolation for the years without available data for social capital and other demographic and cultural variables. The interpolation method is a commonly used method in literature (e.g. Kumar et al. 2011; Hilary and Hui 2009; Alesina and La Ferrara 2000; Hasan et al. 2017a, 2017b) .
 
4
We employ the average social capital of the neighboring counties within a 100-mile radius as an instrumental variable for social capital. As stated in Jha and Cox (2015), this is a strong IV because the social capital of neighboring counties is similar to the social capital in the given county and the mortgage delinquency in a given county is unlikely to have an effect on the average social capital of the neighboring counties.
 
5
Assuming Po ≥ L rules out unsecured debt.
 
6
Seiler et al. (2012) document that disadvantages to defaulting include a substantially reduced FICO score, a greater expense and difficulty obtaining future credit, moving expenses (if the home is a primary residence), potential social backlash from family and friends, possible tax implications, and the chance of the lender pursing a deficiency judgment.
 
7
It is assumed that in the case of a default the borrower will consume his income Y, instead of giving it to the lender. This assumption is inconsequential for the analysis.
 
8
In practice, the lenders will not be able to offer different interest rates to areas with different social capital, as this may be perceived an indirect form of redlining in some cases.
 
9
Note that the change in the upper bound of the distribution has no effect on the probability of default. It is the drop in the lower bound that expands the set of prices that fall below the default threshold level of B-D. It is this asymmetric impact of the changes in the upper versus lower bounds on the default probability that drives our next result.
 
10
We thank Rupasingha, Goetz, and Freshwater for making their social capital index publicly available on http://​aese.​psu.​edu/​nercrd/​community/​social-capital-resources.
 
11
Rupasingha et al. (2006) state that they use “data from the Bureau of the Census, County Business Patterns, USA Counties on CD, National Center for Charitable Statistics, and the Regional Economic Information System” in constructing the social capital index. They also use “the response rate for the Census Bureau’s decennial population and Housing Survey, the percentage of voters who voted in presidential elections, and per capita non-profit organizations obtained from National Center for Charitable Statistics” in constructing the social capital index.
 
12
The related literature has widely employed the interpolation method when using local factors, such as demographic, religious, and other cultural factors, to examine the impact of local factors on financial and economic outcomes in their studies (e.g. Kumar et al. 2011; Hilary and Hui 2009; Alesina and La Ferrara 2000; Hasan et al. 2017a, 2017b). The main reason for linear interpolation for local variables such as social capital is that these variables have a consistent pattern over time and they have stable changes over time, when they change. Also note that some studies backfill data for the missing years instead of applying linear interpolation (e.g., Hilary and Hui 2009; Gompers et al. (2003); Hoi et al. 2018). When we use this alternative method and backfill the social capital data for the missing years, we find very similar results. These results can be provided by the authors upon request.
 
13
Rupasingha et al. (2006) social capital index provides an updated data for the years 1990, 1997, 2005, 2009, and 2014 on the data website (http://​aese.​psu.​edu/​nercrd/​community/​social-capital-resources). We use interpolation for the years without available data.
 
14
We thank the Federal Reserve Bank of New York (FRBNY) for providing the data.
 
15
This variable is provided on the website https://​geofred.​stlouisfed.​org/​map/​. The website states that source of this variable is the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (Federal Reserve Bank of New York and Equifax, Equifax Subprime Credit Population).
 
16
It is in $000’s. Similarly, Change in MedianHouseValue is $000’s.
 
17
We obtain the annual CPI values from the Minneapolis Fed’s website (https://​www.​minneapolisfed.​org/​community/​financial-and-economic-education/​cpi-calculator-information/​consumer-price-index-and-inflation-rates-1913). Both income and median house value variables are standardized and adjusted for inflation. They are in 2000’s dollar values. When we repeat our empirical tests with unstandardized values, we have very similar results and these results can be provided upon request.
 
18
Consistent with the literature, we use interpolations of the data for the years without available data for the Census variables as well as the other controls.
 
19
We use inflation adjusted standardized income and median house values. When we repeat our empirical tests with unstandardized values, we have very similar results the ones provided in the paper. These results can be provided upon request.
 
20
Note that the coefficient value for low social capital is 7–7.5 times the coefficient value for high social capital. However, the difference in the economic impact of Change in MedianHouseValue between two subsamples is small. A one-standard-deviation increase in Change in MedianHouseValue is associated with about a 0.195 standard deviation decrease in mortgage delinquency in the low social capital subsample, and a one-standard-deviation increase in Change in MedianHouseValue is associated with about a 0.13 standard deviation decrease in mortgage delinquency in the low social capital subsample. Thus, while the impact of Change in MedianHouseValue in both subsamples is significant, the difference between the two subsamples is small, and not as big as the impact suggested by the coefficient values.
 
21
The propensity score matching analysis employs 0.1 caliper as the maximum distance level in estimating propensity scores.
 
Literature
Agarwal, S., Chang, Y., & Yavas, A. (2012). Adverse selection in mortgage securitization. Journal of Financial Economics, 105(3), 640–660.
Alesina, A., & La Ferrara, E. (2000). Participation in heterogeneous communities. Quarterly Journal of Economics, 115, 847–904.
Ambrose, B. W., Sanders, A. B., & Yavas, A. (2016). Servicers and mortgage-backed securities default: Theory and evidence. Real Estate Economics, 44(2), 462–489.
Anenberg, E., & Kung, E. (2014). Estimates of the size and source of Price declines due to nearby foreclosures. American Economic Review, 104(8), 2527–2551.
Bubb, R., and Kaufman, A. (2009). Securitization and Moral Hazard: Evidence from Lender Cutoff Rule. Federal Reserve Bank of Boston Public Policy Discussion Papers, (09–5).
Campbell, J. Y. (2012). Mortgage Market Design. Review of Finance, 17, 1–33.
Campbell, J. Y., Giglio, S., & Pathak, P. (2011). Forced sales and house prices. American Economic Review, 101, 2108–2131.
Coleman, J. S. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94, S95–S120.
Coleman, J. S. (1990). Foundations of social theory. Cambridge: Harvard University Press.
Deng, Y., Quigley, J. M., & Van Order, R. (2000). Mortgage terminations, heterogeneity and the exercise of mortgage options. Econometrica, 2, 275–307.
Doms, M., Furlong, F., and Krainer, J. (2007). Subprime Mortgage Delinquency Rates. Working paper, SFFRB working paper No. 2007–33.
Elul, R. (2016). Securitization and mortgage default. Journal of Financial Services Research, 49, 281–309.
FED. (2012). The U.S. Housing Market: Current Conditions and Policy Considerations. White Paper, Board of Governors of the Federal Reserve System.
Ferris, S., Javakhadze, D., & Rajkovic, T. (2017). The international effect of managerial social Captial on the cost of equity. Journal of Banking and Finance, 74, 69–84.
FICO. (2011). Predicting strategic default. April, white paper.
Fisher, L., Lambie-Hanson, L., & Willen, P. S. (2015). The role of proximity in foreclosure externalities: Evidence from condominiums. American Economic Journal: Economic Policy, 7, 119–140.
Gerardi, K., Shapiro, A. H., and Willen, P. S. (2008). Subprime outcomes: Risky mortgages, home ownership experiences, and foreclosures. Working paper.
Gerardi, K. S., Lehnert, A., Sherlund, S. M., and Willen, P. S. (2009). Making sense of the subprime crisis. Brookings Papers on Economic Activity.
Gerardi, K., Rosenblatt, E., Willen, P. S., & Yao, V. (2015). Foreclosure externalities: New evidence. Journal of Urban Economics, 87, 42–56.
Ghent, A. C., & Kudlyak, M. (2011). Recourse and residential mortgage default: Evidence from US states. Review of Financial Studies, 24, 3139–3186.
Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107–155.
Guiso, L., Sapienza, P., & Zingales, L. (2004). The role of social capital in financial development. American Economic Review, 94, 526–556.
Guiso, L., Sapienza, P., & Zingales, L. (2010). Civic capital as the missing link. In J. Benhabib, A. Bisin, & M. Jackson (Eds.), Handbook of social economics. Oxford: Elsevier Science.
Guiso, L., Sapienza, P., & Zingales, L. (2013). Determinants of attitudes toward strategic default on mortgages. Journal of Finance, 68(4), 1473–1515.
Gupta, A., Raman, K., and Shang, C. (2016). Social capital and corporate innovation. Bentley University Working Paper.
Gupta, A., Raman, K., & Shang, C. (2018). Social capital and the cost of equity. Journal of Banking and Finance, 87(C), 102–117.
Harding, J. P., Rosenblatt, E., & Yao, V. (2009). The contagion effect of foreclosed properties. Journal of Urban Economics, 66, 164–178.
Hasan, I., Hoi, C., Wu, Q., & Zhang, H. (2017a). Does social capital matter in corporate decisions? Evidence from corporate tax avoidance. Journal of Accounting Review, 55(3), 629–668.
Hasan, I., Hoi, C., Wu, Q., & Zhang, H. (2017b). Social capital and debt contracting: Evidence from Bank loans and public bonds. Journal of Financial and Quantitative Analysis, 52(3), 1017–1047.
Hasan I., Clark, B., Lai, H., Li, F., & Siddique, A (2020). Social capital and consumer defaults. Journal of Financial Stability.
Hilary, G., & Hui, K. W. (2009). Does religion matter in corporate decision making in America? Journal of Financial Economics, 93, 455–473.
Hoi, C.H., Q. Wu, and H. Zhang(2018). Does social capital mitigate agency problems? Evidence from chief executive officer (CEO) compensation. Journal of Financial Economics, Forthcoming.
Immergluck, D., & Geoff, S. (2006). The impact of single-family mortgage foreclosures on neighborhood crime. Housing Studies, 21, 851–856.
Jackson, M. O. (2014). Networks in the understanding of economic behaviors. Journal of Economic Perspectives, 28, 3–22.
Jackson, M. O., Rodriguez-Barraquer, T., & Xu, T. (2012). Social capital and social quilts: Network patterns of favor exchange. American Economic Review, 102, 1857–1897.
Javakhadze, D., Ferris, S. P., & French, D. W. (2016). Social capital, investments, and external financing. Journal of Corporate Finance, 37, 38–55.
Jha, A., & Chen, Y. (2015). Audit fees and social capital. The Accounting Review, 90, 611–639.
Jha, A., & Cox, J. (2015). Corporate social responsibility and social capital. Journal of Banking & Finance, 60, 252–270.
Keys, B. J., Mukherjee, T. K., Seru, A., & Vig, V. (2010). Did securitization Lead to lax screening? Evidence from subprime loans. The Quarterly Journal of Economics, 125, 307–362.
Knack, S., & Keefer, P. (1997). Does social capital have an economic pay off? A cross-country investigation. Quarterly Journal of Economics, 112, 1251–1288.
Krainer, J., & Laderman, E. (2014). Mortgage loan securitization and relative loan performance. Journal of Financial Services Research, 45, 39–66.
Kumar, A., Page, J. K., & Spalt, O. G. (2011). Religious beliefs, gambling attitudes, and financial market outcomes. Journal of Financial Economics, 102, 671–708.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Trust in large organizations. American Economic Review, 87, 333–338.
Li, L. (2017). Why are foreclosures contagious? Real Estate Economics, 45(4), 979–997.
Putnam, R. D. (1993). Making democracy work: Civic traditions in modern Italy. Princeton: Princeton University Press.
Rupasingha, A., Goetz, S. J., & Freshwater, D. (2006). The production of social capital in US counties. The Journal of Socio-Economics, 35, 83–101.
Seiler, M. J. (2014). The effect of perceived lender characteristics and market conditions on strategic mortgage defaults. Journal of Real Estate Finance and Economics, 48(2), 256–270.
Seiler, M. J., & Walden, E. (2014). Lender characteristics and the neurological reasons for strategic mortgage default. Journal of Real Estate Research, 36(3), 341–362.
Seiler, M. J., Seiler, V. L., Lane, M. A., & Harrison, D. M. (2012). Fear, shame, and guilt: Economic and behavioral motivations for strategic default. Real Estate Economics, 40, S199–S233.
Seiler, M. J., Lane, M. A., & Harrison, D. M. (2014). Mimetic herding behavior and the decision to strategically default. Journal of Real Estate Finance and Economics, 49(4), 621–653.
White, B. (2010). Underwater and not walking away: Shame, fear, and the social management of the housing crisis. Wake Forest Law Review, 45, 971–1023.
Wilkinson-Ryan, T. (2011). Breaching the mortgage contract: The behavioral economics of strategic default. Vanderbilt Law Review, 64(5), 1547–1583.
Woolcock, M. (1998). Social capital and economic development: Toward a theoretical synthesis and policy framework. Theory and Society, 27, 151–208.
Woolcock, M. (2001). The place of social capital in understanding social and economic outcomes. Canadian Journal of Public Policy, 2, 11–17.
Metadata
Title
Social Capital and Mortgage Delinquency
Authors
Lingxiao Li
Erdem Ucar
Abdullah Yavas
Publication date
10-07-2020
Publisher
Springer US
Published in
The Journal of Real Estate Finance and Economics / Issue 3/2022
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI
https://doi.org/10.1007/s11146-020-09775-4

Other articles of this Issue 3/2022

The Journal of Real Estate Finance and Economics 3/2022 Go to the issue

OriginalPaper

Economic Fundamentals, Capital Expenditures and Asset Dispositions

OriginalPaper

Asymmetric Patterns of Demand-Supply Mismatch in Real Estate

OriginalPaper

2018 Real Estate Finance & Investment Symposium

OriginalPaper

The Dynamics of Liquidity in Commercial Property Markets: Revisiting Supply and Demand Indexes in Real Estate

OriginalPaper

Housing Prices, Yields and Credit Conditions in Dublin since 1945