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Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws

38 Pages Posted: 23 Jan 2014 Last revised: 14 Aug 2014

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Yangfan Sun

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

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

Dagher, Jihad C. and Sun, Yangfan, Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws (July 2014). Available at SSRN: https://ssrn.com/abstract=2382975 or http://dx.doi.org/10.2139/ssrn.2382975

Jihad Dagher (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Yangfan Sun

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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