Foreclosing on Opportunity: State Laws and Mortgage Credit

50 Pages Posted: 20 Jun 2003

See all articles by Karen M. Pence

Karen M. Pence

Board of Governors of the Federal Reserve System

Date Written: May 13, 2003

Abstract

Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages. Many states protect borrowers by imposing restrictions on the foreclosure process; these restrictions, in turn, impose large costs on lenders. Lenders may respond to these higher costs by reducing loan supply; borrowers may respond to the protections imbedded in these laws by demanding larger mortgages. I examine empirically the effect of the laws on equilibrium loan size. I exploit the rich geographic information available in the 1994 and 1995 Home Mortgage Disclosure Act data to compare mortgage applications for properties located in census tracts that border each other, yet are located in different states. Using semiparametric estimation methods, I find that defaulter-friendly foreclosure laws are correlated with a four percent to six percent decrease in loan size. This result suggests that defaulter-friendly foreclosure laws impose costs on borrowers at the time of loan origination.

Keywords: Foreclosure, mortgages

JEL Classification: K11, D18, G21

Suggested Citation

Pence, Karen M., Foreclosing on Opportunity: State Laws and Mortgage Credit (May 13, 2003). Available at SSRN: https://ssrn.com/abstract=410768 or http://dx.doi.org/10.2139/ssrn.410768

Karen M. Pence (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States
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