Social Capital and Mortgage Delinquency

This study offers a simple theoretical model and empirical evidence to address the impact of social capital on mortgage delinquency. Social capital includes the norms, values, trust, and information common to a social network, which enable cooperative and shared actions. Using a new county-level dataset between 1999 and 2011 for the U.S, we find new evidence to show that social capital significantly affects the likelihood of mortgage delinquency. In particular, we find that a one-standard-deviation increase in social capital leads to a 0.13 standard deviation decrease in mortgage delinquency. The effect of social capital remains significant after controlling for location fixed effects and addressing endogeneity. The primary explanation is that social norms or trust could limit opportunistic behavior among homeowners and negatively affect strategic default activities. We also find that the impact of social capital on mortgage delinquency increased after the recent financial crisis. Furthermore, we show that the impact of social capital is more pronounced when the default is more likely to be strategic. Our findings have important implications for players in the mortgage industry and for policymakers in that cooperative and shared actions can play an important role in the mortgage default process. Thus, the assessment of default risk should consider social capital in addition to the factors already documented in the literature.