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The effect of foreclosure regulation: Evidence for the US mortgage market at state level

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  • Fernando López Vicente

    ()
    (Banco de España)

Abstract

Do laws to protect borrowers curb foreclosures? This question is addressed by analysing the impact of foreclosure laws on default rates at state level in the US mortgage market. Using panel data techniques, we find a statistically significant effect of regulation on the different stages of the foreclosure process. More precisely, we analyse the effect of regulation on 60- day delinquencies and foreclosure starts, with a focus on three protective elements commonly found in state foreclosure laws, namely requiring a judicial process, granting a redemption period and banning a deficiency judgment. We find that, whereas protective states exhibit, on average, lower 60-day delinquency rates, more protection does not ultimately bring about lower foreclosure rates. Lenders seem to ration credit to mitigate costly protective laws, thereby reducing delinquency rates; but this effect is overshadowed by a moral hazard problem since, once borrowers are delinquent, they have incentives to take advantage of the protection due to the lower costs of foreclosure. We also find that the recent housing market crisis has exacerbated that behaviour. Finally, we show that lengthening the foreclosure process is no cure for the foreclosure crisis

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/13/Fich/dt1306e.pdf
File Function: First version, May 2013
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1306.

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Length: 50 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:bde:wpaper:1306

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Keywords: foreclosure laws; borrower protection; credit rationing; moral hazard;

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  1. Alston, Lee J, 1984. "Farm Foreclosure Moratorium Legislation: A Lesson from the Past," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 445-57, June.
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