Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws

November 26, 2014

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Format: Chicago

Jihad Dagher, and Yangfan Sun. Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws, (USA: International Monetary Fund, 2014) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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

Subject: Bank credit, Banking, Credit, Financial institutions, Loans, Money, Mortgages, National accounts, Personal income

Keywords: Bank characteristic, Bank credit, Borrower protection, Credit, Credit supply, Foreclosure crisis, Foreclosure law, Foreclosure laws, Foreclosure process, Foreclosure timeline, GSE guarantee, GSEs, Judicial foreclosure dummy, Loans, Mortgage market, Mortgages, Personal income, Regulation, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/212
Stock No:

WPIEA2014212
ISBN:

9781498367875
ISSN:

1018-5941

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