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Foreclosing on opportunity: state laws and mortgage credit

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  • Karen M. Pence
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    Abstract

    Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages. Many states protect borrowers by imposing restrictions on the foreclosure process; these restrictions, in turn, impose large costs on lenders. Lenders may respond to these higher costs by reducing loan supply; borrowers may respond to the protections imbedded in these laws by demanding larger mortgages. I examine empirically the effect of the laws on equilibrium loan size. I exploit the rich geographic information available in the 1994 and 1995 Home Mortgage Disclosure Act data to compare mortgage applications for properties located in census tracts that border each other, yet are located in different states. Using semiparametric estimation methods, I find that defaulter-friendly foreclosure laws are correlated with a four percent to six percent decrease in loan size. This result suggests that defaulter-friendly foreclosure laws impose costs on borrowers at the time of loan origination.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-16.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedgfe:2003-16

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    Keywords: Mortgages;

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    1. Glenn B. Canner & Wayne Passmore & Elizabeth Laderman, 1999. "The role of specialized lenders in extending mortgages to lower-income and minority homebuyers," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 709-726.
    2. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 809-30, October.
    3. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
    4. Ambrose, Brent W & Capone, Charles A, Jr & Deng, Yongheng, 2001. "Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure," The Journal of Real Estate Finance and Economics, Springer, vol. 23(2), pages 213-34, September.
    5. Ambrose, Brent W & Buttimer, Richard J, Jr & Capone, Charles A, 1997. "Pricing Mortgage Default and Foreclosure Delay," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 314-25, August.
    6. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation Of Elementary Education," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 577-599, May.
    7. Jones, Lawrence D, 1993. "Deficiency Judgments and the Exercise of the Default Option in Home Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 115-38, April.
    8. Alston, Lee J, 1984. "Farm Foreclosure Moratorium Legislation: A Lesson from the Past," American Economic Review, American Economic Association, vol. 74(3), pages 445-57, June.
    9. David M. Cutler & Edward L. Glaeser, 1995. "Are Ghettos Good or Bad?," NBER Working Papers 5163, National Bureau of Economic Research, Inc.
    10. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
    11. Clauretie, Terrence M & Herzog, Thomas N, 1990. "The Effect of State Foreclosure Laws on Loan Losses: Evidence from the Mortgage Insurance Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 221-33, May.
    12. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
    13. Jack Porter, 2002. "Asymptotic Bias and Optimal Convergence Rates for Semiparametric Kernel Estimators in the Regression Discontinuity Model," Harvard Institute of Economic Research Working Papers 1989, Harvard - Institute of Economic Research.
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    Cited by:
    1. Anthony Pennington-Cross, 2010. "The Duration of Foreclosures in the Subprime Mortgage Market: A Competing Risks Model with Mixing," The Journal of Real Estate Finance and Economics, Springer, vol. 40(2), pages 109-129, February.
    2. Andrew Haughwout & Richard Peach & Joseph Tracy, 2008. "Juvenile delinquent mortgages: bad credit or bad economy?," Staff Reports 341, Federal Reserve Bank of New York.
    3. Anthony Pennington-Cross, 2006. "The Value of Foreclosed Property," Journal of Real Estate Research, American Real Estate Society, vol. 28(2), pages 193-214.
    4. Frölich, Markus & Lechner, Michael, 2006. "Exploiting Regional Treatment Intensity for the Evaluation of Labour Market Policies," IZA Discussion Papers 2144, Institute for the Study of Labor (IZA).
    5. Donald P. Morgan, 2007. "Defining and detecting predatory lending," Staff Reports 273, Federal Reserve Bank of New York.
    6. Markus Frölich & Michael Lechner, 2004. "Regional treatment intensity as an instrument for the evaluation of labour market policies," University of St. Gallen Department of Economics working paper series 2004 2004-08, Department of Economics, University of St. Gallen.
    7. Morris M. Kleiner & Richard M. Todd, 2007. "Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, and Outcomes for Consumers," NBER Working Papers 13684, National Bureau of Economic Research, Inc.
    8. Giang Ho & Anthony Pennington-Cross, 2005. "The impact of local predatory lending laws," Working Papers 2005-049, Federal Reserve Bank of St. Louis.
    9. Pablo Casas-Arce & Albert Saiz, 2006. "Owning versus leasing: do courts matter?," Working Papers 06-21, Federal Reserve Bank of Philadelphia.

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