Neighborhood Effects in Mortgage Default Risk

This study examines the effect of neighborhood characteristics on the default of FHA mortgages. The analysis includes both neighborhood characteristics and characteristics of the individual loan and borrower, so that the effects of the neighborhood can be distinguished from those of the individual loan. In particular, the analysis seeks to distinguish the effects of neighborhood race, ethnicity, and income from the effects of the individual borrower’s status. Research on the effects of neighborhood characteristics on default has been somewhat limited in the past, and this study’s contribution to the literature is the inclusion of credit history data. The analysis finds that lower tract income and higher tract black composition are associated with higher rates of default, whereas individual borrower race or income are unrelated to default.