Recourse restrictions and judicial foreclosures: Effects of mortgage law on loan price and collateralization

Borrower-friendly laws, such as recourse restrictions and judicial foreclosures, impose higher costs and risks to lenders. Yet, there is little evidence on how lenders transfer them to borrowers at the mortgage origination. By exploiting the mortgage law heterogeneity across U.S. states, I show that...

Full description

Saved in:
Bibliographic Details
Published in:International review of law and economics 2023-09, Vol.75, p.106142, Article 106142
Main Author: Sá, Ana Isabel
Format: Article
Language:English
Subjects:
Interest rate
Judicial foreclosure
Loan-to-value ratio
Mortgage
Mortgage contract terms
Mortgage law
Non-recourse
Recourse
Citations: Items that this one cites
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Borrower-friendly laws, such as recourse restrictions and judicial foreclosures, impose higher costs and risks to lenders. Yet, there is little evidence on how lenders transfer them to borrowers at the mortgage origination. By exploiting the mortgage law heterogeneity across U.S. states, I show that recourse restrictions trigger a collateral channel, through which lenders require a 1.6 to 1.9 percentage points lower loan-to-value ratio to compensate for worse recovery opportunities and respective higher expected loss. This effect holds both before and after the Great Recession, and is robust to a regression discontinuity design approach. I also find that lenders do not penalize strategic defaults when recourse is not allowed. Regarding the impact of judicial requirements, the findings are mixed. •Lenders transfer mortgage law’s risks and cost to borrowers.•Under non-recourse law, lenders require more collateral in mortgage origination.•The impact of judicial foreclosures on mortgage origination is not clear.•There is no evidence of risk and cost transfers through mortgage interest rates.•Borrower-friendly laws might limit household’s access to the mortgage market.
ISSN:0144-8188
1873-6394
DOI:10.1016/j.irle.2023.106142