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Recourse restrictions and judicial foreclosures: Effects of mortgage law on loan price and collateralization

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  • Sá, Ana Isabel

Abstract

Borrower-friendly laws, such as recourse restrictions and judicial foreclosures, impose higher costs and risks to lenders. Yet, there is little evidence on how lenders transfer them to borrowers at the mortgage origination. By exploiting the mortgage law heterogeneity across U.S. states, I show that recourse restrictions trigger a collateral channel, through which lenders require a 1.6 to 1.9 percentage points lower loan-to-value ratio to compensate for worse recovery opportunities and respective higher expected loss. This effect holds both before and after the Great Recession, and is robust to a regression discontinuity design approach. I also find that lenders do not penalize strategic defaults when recourse is not allowed. Regarding the impact of judicial requirements, the findings are mixed.

Suggested Citation

  • Sá, Ana Isabel, 2023. "Recourse restrictions and judicial foreclosures: Effects of mortgage law on loan price and collateralization," International Review of Law and Economics, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:irlaec:v:75:y:2023:i:c:s0144818823000200
    DOI: 10.1016/j.irle.2023.106142
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    More about this item

    Keywords

    Mortgage; Judicial foreclosure; Recourse; Non-recourse; Mortgage law; Mortgage contract terms; Interest rate; Loan-to-value ratio;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K25 - Law and Economics - - Regulation and Business Law - - - Real Estate Law
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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