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Do borrower rights improve borrower outcomes? Evidence from the foreclosure process

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Listed:
  • Kristopher S. Gerardi
  • Lauren Lambie-Hanson
  • Paul S. Willen

Abstract

Many have argued that laws that give borrowers additional rights can help prevent unnecessary foreclosures by giving borrowers more time to cure their delinquencies or by facilitating workouts. We first compare states that allow power-of-sale foreclosures with states that do not and find that preventing power-of-sale foreclosures extends the foreclosure timeline dramatically but does not, in the long run, lead to fewer foreclosures. Borrowers in states that allow power-of-sale foreclosure are no less likely to cure and no less likely to renegotiate their loans. We then exploit a "right-to-cure" law instituted in Massachusetts in May 2008. We employ a differences-in-differences approach to evaluate the effect of the policy, comparing Massachusetts with neighboring states that did not adopt such laws. We find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers.

Suggested Citation

  • Kristopher S. Gerardi & Lauren Lambie-Hanson & Paul S. Willen, 2011. "Do borrower rights improve borrower outcomes? Evidence from the foreclosure process," FRB Atlanta Working Paper 2011-16, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2011-16
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    References listed on IDEAS

    as
    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. Christopher Foote & Kristopher Gerardi & Lorenz Goette & Paul Willen, 2010. "Reducing Foreclosures: No Easy Answers," NBER Chapters,in: NBER Macroeconomics Annual 2009, Volume 24, pages 89-138 National Bureau of Economic Research, Inc.
    3. Atif Mian & Amir Sufi & Francesco Trebbi, 2015. "Foreclosures, House Prices, and the Real Economy," Journal of Finance, American Finance Association, vol. 70(6), pages 2587-2634, December.
    4. Richard A. Phillips & James H. VanderHoff, 2004. "The Conditional Probability of Foreclosure: An Empirical Analysis of Conventional Mortgage Loan Defaults," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 571-587, December.
    5. Acemoglu, Daron & Rogoff, Kenneth & Woodford, Michael (ed.), 2010. "NBER Macroeconomics Annual 2009," National Bureau of Economic Research Books, University of Chicago Press, number 9780226002095.
    6. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
    7. Richard A. Phillips & Eric M. Rosenblatt, 1997. "The Legal Environment and the Choice of Default Resolution Alternatives: An Empirical Analysis," Journal of Real Estate Research, American Real Estate Society, vol. 13(2), pages 145-154.
    8. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," Review of Financial Studies, Society for Financial Studies, pages 3139-3186.
    9. Karen M. Pence, 2006. "Foreclosing on Opportunity: State Laws and Mortgage Credit," The Review of Economics and Statistics, MIT Press, pages 177-182.
    10. J. Michael Collins & Ken Lam & Christopher E. Herbert, 2011. "State mortgage foreclosure policies and lender interventions: Impacts on borrower behavior in default," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 30(2), pages 216-232, March.
    11. Zachary K. Kimball & Paul S. Willen, 2012. "US mortgage and foreclosure law," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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