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

• 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
• ISSN: 0144-8188; 1873-6394
• DOI: 10.1016/j.irle.2023.106142

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.