Housing Collateral Reform and Economic Reallocation

Abstract

This paper investigates the spillover effects of improving creditor rights through a Brazilian reform that expanded the use of a collateral contract with superior repossession rights to home-backed, non-real estate loans. We find that stronger creditor protection results in a significant credit reallocation in the economy. Municipalities with higher homeownership experience increased credit, entrepreneurship, and employment. However, banks simultaneously restrict credit in low homeownership municipalities, adversely impacting economic activities. The credit reallocation is strongest for financially constrained banks, consistent with high external financing costs. Moreover, labor reallocates from low to high homeownership municipalities, demonstrating the reform's broad economic effects.

Keywords: creditor rights, home-backed loans, credit spillovers, financial constraints, entrepreneurship

JEL Classification: G21, K22, O16