Red Tape, Greenleaf: Creditor Behavior Under Costly Collateral Enforcement

Abstract

I show that when repossessing collateral becomes costly, creditors choose to sell their delinquent debt on the secondary market rather than renegotiate with borrowers. Only when repossession becomes prohibitively expensive, thus impeding sale, do creditors offer forbearance. I exploit quasi-experimental variation from an increase in foreclosure costs due to Maine’s Greenleaf judgment. To foreclose on loans associated with an electronic registry, the judgment required affected creditors to request reassignment of their mortgage from the initial lender. For treated loans, I estimate that foreclosures fell by 26% (0.09 pp) and debt sales increased by 57% (0.05 pp). I find no evidence of an increase in formal modifications on the part of creditors or default on the part of borrowers. If the initial lender filed for bankruptcy, treated loans experienced no increase in sales. Instead, these loans benefited from reduced delinquency in a manner resembling creditor forbearance.

Keywords: corporate finance, financial intermediation, real estate finance, collateral enforcement, foreclosure costs, financial technology

JEL Classification: G21, G23, G28, G33, G51, O33, P14