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.
Keywords: Foreclosure, mortgages
Full paper (1086 KB PDF)
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Last update: May 14, 2003
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