The authors thank Chris Cunningham, Chris Foote, Scott Frame, Lauren Lambie-Hanson, Steve Ross, and Joe Tracy forhelpful conversations. They also thank Stefano Giglio and Susan Wachter for excellent discussions at the 2012 SpringHULM and 2012 Mid-year AREUEA meetings, respectively. The views expressed here are the authors’ and not necessarilythose of Fannie Mae, the Federal Reserve Banks of Atlanta or Boston, or the Federal Reserve System. Any remainingerrors 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, email@example.com; Eric Rosenblatt, ResearchDepartment, Federal National Mortgage Association (Fannie Mae), 16517 Keats Terrace, Derwood, MD 20855,firstname.lastname@example.org; Paul S. Willen, Research Department, Federal Reserve Bank of Boston and NBER, 600 Atlantic Avenue, Boston, MA 02210, email@example.com; or Vincent W. Yao, Federal National Mortgage Association(Fannie Mae), 16517 Keats Terrace, Derwood, MD 20855, firstname.lastname@example.org.Federal Reserve Bank of Atlanta working papers, including revised versions, are available on the Atlanta Fed’s website atfrbatlanta.org/pubs/WP/. Use the WebScriber service at frbatlanta.org to receive e-mail notifications about new papers.
FEDERAL RESERVE BANK
WORKING PAPER SERIES
Foreclosure Externalities: Some New Evidence
Kristopher Gerardi, Eric Rosenblatt, Paul S. Willen,and Vincent W. Yao Working Paper 2012-11 August 2012
In a recent set of influential papers, researchers have argued that residential mortgageforeclosures reduce the sale prices of nearby properties. We revisit this issue using a more robustidentification strategy combined with new data that contain information on the location of propertiessecured 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, negativeeffects on nearby home values, the magnitudes are economically small, peak
the distressedproperties complete the foreclosure process, and go to zero about a year after the bank sells theproperty to a new homeowner. The estimates are very sensitive to the condition of the distressedproperty, with a positive correlation existing between house price growth and foreclosed propertiesidentified as being in “above average” condition. We argue that the most plausible explanation forthese 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 likelyexacerbate the negative effect of mortgage distress on house prices.JEL classification: G21, K11, R31Key words: foreclosure, mortgage, judicial, power of sale, right to cure