Foreclosure Contagion : Measurement and Mechanisms

In this paper we ask whether foreclosures are contagious: does a completed foreclosure cause neighboring foreclosure filings? We estimate this relationship using administrative data on home foreclosures and sales in Cook County, IL, and instrument a completed foreclosure using random assignment of chancery-court judges. We find that a completed foreclosure causes between 0.5 and 0.7 additional filings within 0.1 miles, an effect that persists for several years. We interpret our results as evidence that contagion is driven by borrowers (rather than lenders). Moreover, contagion is not driven by borrowers in negative equity, but by borrowers learning from neighboring foreclosures. We also find that foreclosure disrupts local housing markets, increasing sales of neighboring lower-quality properties