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http://ssrn.com/abstract=1717127
 
 

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The Influence of Foreclosure Delays on Borrower's Default Behavior


Shuang Zhu


Kansas State University - Department of Finance

R. Kelley Pace


Louisiana State University - E.J. Ourso College of Business Administration

April 19, 2011

46th Annual AREUEA Conference Paper

Abstract:     
This paper investigates the influence of expected foreclosure duration on a borrower's future default propensity. We use the lagged actual time-varying state-level foreclosure times as proxies for borrower's expected benefit from default as the form of "free rent.'' While existing literature includes the single-year non-contested foreclosure times as proxies for lengthiness of the foreclosure process, our measure uses the actual foreclosure times and captures the variation in foreclosure duration over time. We document the increase in foreclosure duration in recent years and find a statistically and economically significant impact of foreclosure delay on borrower default behavior. The results are robust to various specifications including state fixed effects, different measures for delays, and year fixed effects. The results are not driven by the major states in the sample nor by the number of years of tracked loan performances.

When the property value is likely to be less than the mortgage balance, the expected delay tends to have a larger impact on default. For high initial combined loan-to-value ratio mortgages, the delay has the strongest impact on default and the effect is consistent across various loan types and borrowers with different credit scores. In the current market condition where many borrowers have negative equity, the longer delay tends to have a larger magnitude of impact on default, which may make default optimal for more borrowers. We suggest policy makers to take the negative effect of longer foreclosure delay into consideration when taking actions to mitigate foreclosure crisis.

Number of Pages in PDF File: 26

Keywords: foreclosure, foreclosure delay, foreclosure time, mortgage default

JEL Classification: G3

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Date posted: November 29, 2010 ; Last revised: April 24, 2011

Suggested Citation

Zhu, Shuang and Pace, R. Kelley, The Influence of Foreclosure Delays on Borrower's Default Behavior (April 19, 2011). 46th Annual AREUEA Conference Paper. Available at SSRN: http://ssrn.com/abstract=1717127 or http://dx.doi.org/10.2139/ssrn.1717127

Contact Information

Shuang Zhu (Contact Author)
Kansas State University - Department of Finance ( email )
Manhattan, KS 66506
United States
R. Kelley Pace
Louisiana State University - E.J. Ourso College of Business Administration ( email )
Department of Finance
2164 B Patrick F. Taylor Hall
Baton Rouge, LA 70803-6308
United States
(225)-578-6256 (Phone)
(225)-578-9065 (Fax)
HOME PAGE: http://www.spatial-statistics.com
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