Impact of Foreclosure Laws on Mortgage Loan Supply and Performance
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This paper measures the impact of three types of defaulter-friendly foreclosure laws on the behaviors of mortgage lenders in loan origination, and borrowers in default decision. To disentangle the “pure” influence of foreclosure laws from that of unobserved regional factors, we use the border identification strategy to sort the loan sample in the zip codes on both sides of a border dividing states by the foreclosure laws adopted. Unlike the previous research, we find no conclusive evidence on the causal effects of foreclosure laws on loan supply and default risk. The empirical results are highly sensitive to fixed effect specifications, time period, and sample selection.
KeywordsMortgage lending Mortgage default Foreclosure laws Border identification strategy
We are grateful to Sumit Agarwal, Brent Ambrose, Yongheng Deng, and the anonymous referees for their valuable comments. All errors are ours. Daxuan Zhao acknowledges the financial support of the National Science Foundation of China (71704182).
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