The effect of foreclosure regulation: Evidence for the US mortgage market at state level

Fernando López Vicente

No 1306, Working Papers from Banco de España

Abstract: Do laws to protect borrowers curb foreclosures? This question is addressed by analysing the impact of foreclosure laws on default rates at state level in the US mortgage market. Using panel data techniques, we find a statistically significant effect of regulation on the different stages of the foreclosure process. More precisely, we analyse the effect of regulation on 60- day delinquencies and foreclosure starts, with a focus on three protective elements commonly found in state foreclosure laws, namely requiring a judicial process, granting a redemption period and banning a deficiency judgment. We find that, whereas protective states exhibit, on average, lower 60-day delinquency rates, more protection does not ultimately bring about lower foreclosure rates. Lenders seem to ration credit to mitigate costly protective laws, thereby reducing delinquency rates; but this effect is overshadowed by a moral hazard problem since, once borrowers are delinquent, they have incentives to take advantage of the protection due to the lower costs of foreclosure. We also find that the recent housing market crisis has exacerbated that behaviour. Finally, we show that lengthening the foreclosure process is no cure for the foreclosure crisis

Keywords: foreclosure laws; borrower protection; credit rationing; moral hazard (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 K11 R20 R30 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2013-05
New Economics Papers: this item is included in nep-ban, nep-law and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1306

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