Epidemiological spreading of mortgage default

Abstract

Purpose

This paper aims to introduce mathematical models to capture the spreading of epidemics to explain the expansion of mortgage default events in the USA.

Design/methodology/approach

The authors use the state of infectiousness and death to represent the subsequent steps of payment elinquency and default, respectively. As the local economic structure influences regional unemployment, which is a strong driver of mortgage default, the authors model interdependencies of regional mortgage default rates through employment conditions and vicinity.

Findings

Based on a large sample between 2000 and 2014 of loan-level data, the estimation of key parameters of the model is proposed. The model’s forecast accuracy shows an above-average performance compared to well-known approaches such as linear regression or logit models.

Originality/value

The key findings may be useful in understanding the dynamics of mortgage defaults and its spatial spreading.

Citation

Schweikert, J. and Höchstötter, M. (2019), "Epidemiological spreading of mortgage default", International Journal of Housing Markets and Analysis, Vol. 12 No. 1, pp. 74-93. https://doi.org/10.1108/IJHMA-05-2017-0047