Social Capital and Mortgages

Abstract

We discover that the social capital of the community in which households live positively influences the likelihood that their mortgage applications are approved, the terms of approved mortgages, and the subsequent performance on those mortgages. The results hold when conditioning on household and community characteristics and an array of fixed effects, including individual effects data permitting, and when employing instrumental variables and propensity score matching to address identification and selection concerns. Concerning causal mechanisms, evidence suggests that social capital enhances lender screening and monitoring of borrowers and increases the social costs to borrowers from defaulting on their debts.