To Change or Not to Change: The Impact of the Law on Mortgage Origination

Banco de Portugal Working Papers 2020

64 Pages Posted: 8 Feb 2021

See all articles by Ana Isabel Sá

Ana Isabel Sá

Faculdade de Economia da Universidade do Porto

Date Written: December 2020

Abstract

Differences in mortgage law have significant effects on loan characteristics at origination. Borrower-friendly laws impose higher costs and risks for lenders and, thus, induce effects on mortgage pricing and leverage. However, not all borrower-friendly laws have the same effects. This finding is established using loan-level data for the U.S. mortgage market between 2001 and 2011. Judicial foreclosure requirements imply higher mortgage interest rates due to higher recovery costs and activate the price channel. Recourse restrictions imply higher loan collateralization to compensate for the fewer recovery opportunities and activate the collateral channel.

Keywords: mortgage, mortgage law, interest rate, mortgage pricing, judicial foreclosure, nonrecourse, loan-to-value ratio, credit supply

JEL Classification: E43, G21, G28, K25, K35

Suggested Citation

Sá, Ana Isabel, To Change or Not to Change: The Impact of the Law on Mortgage Origination (December 2020). Banco de Portugal Working Papers 2020, Available at SSRN: https://ssrn.com/abstract=3751437 or http://dx.doi.org/10.2139/ssrn.3751437

Ana Isabel Sá (Contact Author)

Faculdade de Economia da Universidade do Porto ( email )

Rua Dr. Roberto Frias
4200-464 Porto
Portugal

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