Does Social Capital Affect Mortgage Loan Termination by Low-Income Homeowners?

Abstract

We study whether social capital affects low-income borrowers’ decisions to terminate their mortgage loans, originated after church leaders connected these borrowers with a lender. Loan termination is modeled in a competing-risks framework, where social capital, demographic and religious characteristics as well as traditional economic factors affect mortgage termination. We find evidence that heterogeneity of social trust in the wider community is associated with decreased default and prepayment hazards, indicating that low-income borrowers value bridging social capital linking them to the wider community. The evidence suggests a role for social capital in mortgage loans and perhaps other financial contracts.

Keywords: low-income borrowers, social capital, mortgage loan termination, competing-risks

JEL Classification: R10, Z13