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Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process

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

Abstract

We evaluate laws designed to protect borrowers from foreclosure. We find that these laws delay but do not prevent foreclosures. We first compare states that require lenders to seek judicial permission to foreclose with states that do not. Borrowers in judicial states are no more likely to cure and no more likely to renegotiate their loans, but the delays lead to a build-up in these states of persistently delinquent borrowers, the vast majority of whom eventually lose their homes. We next analyze a "right-to-cure" law instituted in Massachusetts on May 1, 2008. Using a difference-in-differences approach to evaluate the effect of the policy, we compare Massachusetts with neighboring states that did not adopt similar 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 Gerardi & Lauren Lambie-Hanson & Paul S. Willen, 2011. "Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process," NBER Working Papers 17666, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17666
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    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. Acemoglu, Daron & Rogoff, Kenneth & Woodford, Michael (ed.), 2010. "NBER Macroeconomics Annual 2009," National Bureau of Economic Research Books, University of Chicago Press, number 9780226002095.
    4. 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.
    5. 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.
    6. 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.
    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, vol. 24(9), pages 3139-3186.
    9. Karen M. Pence, 2006. "Foreclosing on Opportunity: State Laws and Mortgage Credit," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 177-182, February.
    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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