State Foreclosure Laws and Mortgage Origination in the Subprime Market

Abstract

Foreclosure procedures in some states are considerably swifter and less costly for lenders than in others. In light of the foreclosure crisis, an empirical understanding of the effect of foreclosure procedures on the mortgage market is critical. This study finds that lender-favorable foreclosure procedures are associated with more lending activity in the subprime market. The study uses hand-coded state foreclosure law variables to construct a numerical index measuring the favorability of state foreclosure laws to lenders. Mortgage origination data from state-border areas shows that lender-friendly foreclosure is associated with an increase in subprime originations, but has less effect on the prime market.

Keywords: foreclosure, foreclosure procedure, foreclosure law, subprime lending, mortgage origination, real estate finance, real estate economics

JEL Classification: G21, G28