Foreclosure Externalities: Some New Evidence

Kristopher Gerardi, Eric Rosenblatt, Paul S. Willen, and Vincent W. Yao
Working Paper 2012-11
August 2012

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In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

JEL classification: G21, K11, R31

Key words: foreclosure, mortgage, judicial, power of sale, right to cure


The authors thank Chris Cunningham, Chris Foote, Scott Frame, Lauren Lambie-Hanson, Steve Ross, and Joe Tracy for helpful conversations. They also thank Stefano Giglio and Susan Wachter for excellent discussions at the 2012 Spring HULM and 2012 Mid-year AREUEA meetings, respectively. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Kristopher Gerardi, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, GA 30309-4470, 404-498-8561, kristopher.gerardi@atl.frb.org; Eric Rosenblatt, Research Department, Federal National Mortgage Association (Fannie Mae), 16517 Keats Terrace, Derwood, MD 20855, eric_rosenblatt@fanniemae.com; Paul S. Willen, Research Department, Federal Reserve Bank of Boston and NBER, 600 Atlantic Avenue, Boston, MA 02210, paul.willen@bos.frb.org; or Vincent W. Yao, Federal National Mortgage Association (Fannie Mae), 16517 Keats Terrace, Derwood, MD 20855, vincent_w_yao@fanniemae.com.

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