Description

Laws governing the foreclosure process can have direct consequences on the costs offoreclosure and could therefore affect lending decisions. We exploit the heterogeneity inthe judicial requirements across U.S. states to examine their impact on banks’ lendingdecisions in a sample of urban areas straddling state borders. A key feature of our study isthe way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shiftthe burden of foreclosure costs onto the GSEs. We find that judicial requirements reducethe supply of credit only for jumbo loans that are ineligible for GSE guarantees. Theselaws do not affect, however, the relative demand of jumbo loans. Our findings, which alsohold using novel nonbinary measures of judicial requirements, illustrate the consequencesof foreclosure laws on the supply of mortgage credit. They also shed light on a significantindirect cross-subsidy by the GSEs to borrower-friendly states that has been overlookedthus far.

More publications in this series: Working Papers

More publications by: Jihad Dagher ; Yangfan Sun