Date of Award
2012
Degree Type
Open Access Dissertation
Degree Name
Political Science and Economics, PhD interfield
Program
School of Politics and Economics
Advisor/Supervisor/Committee Chair
Thomas E. Borcherding
Dissertation or Thesis Committee Member
Jennifer Merolla
Dissertation or Thesis Committee Member
Mark Abdollahian
Terms of Use & License Information
Rights Information
© 2012 Michael Wilkerson
Keywords
mortgage, housing market, bubble, double trigger, strategic default
Subject Categories
Economics | Public Policy
Abstract
This dissertation focuses on mortgage defaults in Southern California during the housing bubble of the 2000s. The rapid decline in the housing market that precipitated the current recession has been accompanied by an unprecedented number of loan defaults and foreclosures. Recent studies have identified two major theories of default--the "double trigger" hypothesis, where negative equity and an income shock are necessary conditions for default--and "strategic default" where negative equity is a sufficient condition for default. This paper adds to the default literature by adding short sale as another possible outcome of mortgage default.
The primary goal is to analyze the determinants of mortgage default to assist in understanding the conditions under which strategic behavior of home sales is most likely to occur. Data from Los Angeles County was analyzed from 2007 to 2010 for every closed sale, then coded into three possible sales outcomes: 1) Organic 2) Short Sale 3) Real Estate Owned (REO). A multinomial probit model was used to model homeowner decision-making based on the sale outcome. The model rejected the "double trigger" hypothesis, as it was found that income shocks do no have a significant effect on impacting the predicted probability for distressed sales. Education levels, the sales price of homes, credit card debt, and market price reductions were found to be significant variables in determining distressed sales outcomes, thereby confirming the strategic default hypothesis.
The next section studied spatial association of short sales and REO to see if any contagion effects were present. It was found that both short sales and REO form into clusters of hot and cold spots. Social stigma is believed to impact consumer behavior, the theory was confirmed through the findings of contagion and spatial lag. The final section constructed a hedonic price model to capture the price effects that distressed sales have on neighborhood pricing. Foreclosures were found to have three times the negative impact on neighborhood pricing compared to short sales.
DOI
10.5642/cguetd/35
Recommended Citation
Wilkerson, Michael. (2012). Mortgage Default in Southern California: Examining Distressed Borrower's Decision Making and Market Contagion. CGU Theses & Dissertations, 35. https://scholarship.claremont.edu/cgu_etd/35. doi: 10.5642/cguetd/35