Modeling Spatially Interdependent Mortgage Decisions

House price regression residuals often display spatial dependence but historically mortgage models, which employ house prices, assume independence and use only the own borrower/loan characteristics. This manuscript uses a spatial probit model to investigate spatial dependence among the disturbances and the effect of borrower/loan characteristics from nearby properties on own default propensity. We find that allowing spatial dependence in the disturbances greatly improve the predictive accuracy of a probit default model, and that spillovers from risky neighbor characteristics have statistically significant and material effects on own payment default propensity. In addition, measurement of spatial effects can improve policy analysis. Copyright Springer Science+Business Media New York 2014