The Economic Effects of Legal Restrictions on High-Cost Mortgages

  • Jevgenijs SteinbuksEmail author
  • Gregory Elliehausen


We analyze the effects of state predatory mortgage lending laws, which have been a model for recent changes in the United States federal legislation enacted to regulate the mortgage contract terms common in higher-risk mortgage market segments. Using the Rothschild-Stiglitz approach to model credit markets under asymmetric information, legal restrictions are shown to reduce the use and attractiveness of mortgage credit. Consistent with model predictions, empirical results indicate that originations of regulated high-cost mortgages were significantly less than predicted in states with more restrictive laws. The differences between predicted and actual originations of high-cost mortgages in states with less restrictive laws were not significant. These differences were also not significant for non-high-cost originations across all states. Thus, credit regulation was differentially associated with reduction in originations of high-cost mortgages, and non-high-cost lending did not consistently expand in areas where high-cost mortgages were restricted.


Dodd-Frank Act High-cost mortgages Mortgage credit Prepayment penalties Subprime lending 



The authors are indebted to Anthony Yezer for his invaluable contribution. They would like to thank Kenneth Brevoort, Jan Bruekner, Mike Staten, George Wallace, the anonymous reviewer, members of FSRP advisory board, and seminar participants at the Bank of England, Bocconi University, the George Washington University, Miami University, and the University of Guelph for helpful comments. The views expressed in this paper are those of the authors and do not represent the views of the Board of Governors or its staff. All remaining errors are ours.


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Purdue UniversityWest LafayetteUSA
  2. 2.Federal Reserve Board of GovernorsWashingtonUSA

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