Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws
38 Pages Posted: 23 Jan 2014 Last revised: 14 Aug 2014
Date Written: July 2014
Laws governing the foreclosure process can have direct consequences on the costs of foreclosure and could therefore affect lending decisions. We exploit the heterogeneity in judicial requirements across U.S. state borders to examine their impact on banks' lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shift the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans that are ineligible for GSE guarantees. These laws do not affect, however, the relative demand of jumbo loans. Our findings, which also hold using novel non-binary measures of judicial requirements, illustrate the consequences of foreclosure laws on the supply of mortgage credit. They also shed light on a significant indirect cross-subsidization by the GSEs to borrower-friendly states that has been overlooked thus far.
Keywords: Foreclosure laws, Credit supply, GSEs, Jumbo loans
JEL Classification: G21, G28
Suggested Citation: Suggested Citation