Foreclosing on Opportunity: State Laws and Mortgage Credit

Karen M. Pence, Federal Reserve Board of Governors

Abstract

Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages. In states with laws favoring the borrower, the supply of mortgage credit may decrease because lenders face higher costs. To investigate the laws' effects, I compare approved mortgage applications in census tracts that border each other but are located in different states. Using a regression-discontinuity design and semiparametric estimation methods, I find that loan sizes are 3% to 7% smaller in defualter-friendly states; this result suggest that defaulter-friendly laws impose matieral cost on borrowers at the time of loan origination.