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Legal Restrictions in Personal Loan Markets


  • Brent Ambrose


  • Anthony Sanders



This study examines the pricing of personal loans in the form of second mortgages to determine whether state-specific default laws have an effect on the availability and cost of that debt. We examine the pricing of loans to higher risk borrowers and whether borrowers in states that limit lender ability to seek default remedies pay higher credit costs. Our results indicate that, for the most part, lenders rationally price loans to higher risk borrowers. However, when we focus on borrowers with low credit scores, the results indicate that mean actual loan rates are higher than those predicted by our model. The results also indicate that state-specific default laws have an effect on the price of credit. Finally, the results show that there is a greater degree of error in the pricing of second mortgage loans to borrowers with low credit scores than to borrowers with high credit scores. Copyright Springer Science + Business Media, Inc. 2004

Suggested Citation

  • Brent Ambrose & Anthony Sanders, 2004. "Legal Restrictions in Personal Loan Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 133-151, November.
  • Handle: RePEc:kap:jrefec:v:30:y:2004:i:2:p:133-151 DOI: 10.1007/s11146-004-4876-y

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    References listed on IDEAS

    1. Ambrose, Brent W. & Pennington-Cross, Anthony, 2000. "Local economic risk factors and the primary and secondary mortgage markets," Regional Science and Urban Economics, Elsevier, vol. 30(6), pages 683-701, December.
    2. Barth, James R & Cordes, Joseph J & Yezer, Anthony M J, 1986. "Benefits and Costs of Legal Restrictions on Personal Loan Markets," Journal of Law and Economics, University of Chicago Press, vol. 29(2), pages 357-380, October.
    3. Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-274, May.
    4. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    5. Ambrose, Brent W & Buttimer, Richard J, Jr, 2000. "Embedded Options in the Mortgage Contract," The Journal of Real Estate Finance and Economics, Springer, vol. 21(2), pages 95-111, September.
    6. 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 314-325, August.
    7. 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 221-233, May.
    8. Alston, Lee J, 1984. "Farm Foreclosure Moratorium Legislation: A Lesson from the Past," American Economic Review, American Economic Association, vol. 74(3), pages 445-457, June.
    9. 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 809-830, October.
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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. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2006. "An empirical analysis of home equity loan and line performance," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 444-469, October.
    3. Anthony Pennington-Cross & Giang Ho, 2008. "Predatory Lending Laws and the Cost of Credit," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(2), pages 175-211, June.
    4. Giang Ho & Anthony Pennington-Cross, 2005. "The impact of local predatory lending laws," Working Papers 2005-049, Federal Reserve Bank of St. Louis.
    5. Gregory E. Elliehausen & Min Hwang, 2010. "Mortgage contract choice in subprime mortgage markets," Finance and Economics Discussion Series 2010-53, Board of Governors of the Federal Reserve System (U.S.).
    6. Sanders, Anthony, 2008. "The subprime crisis and its role in the financial crisis," Journal of Housing Economics, Elsevier, vol. 17(4), pages 254-261, December.

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    second mortgages; credit risk; mortgage pricing;


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