State Foreclosure Laws and Mortgage Origination
in the Subprime
Published online: 11 August 2013
Springer Science+Business Media New York 2013
Abstract Foreclosure procedures in some states are considerably swifter and less
costly for lenders than in others. In light of the foreclosure crisis, an empirical
understanding of the effect of foreclosure procedures on the mortgage market is
critical. This study finds that lender-favorable foreclosure procedures are associated
with more lending activity in the subprime market. The study uses hand-coded state
foreclosure law variables to construct a numerical index measuring the favorability of
state foreclosure laws to lenders. Mortgage origination data from state-border areas
shows that lender-friendly foreclosure is associated with an increase in subprime
originations, but has less effect on the prime market.
Real estate finance
Real estate economics
Widespread mortgage default during the foreclosure crisis has led to increased interest in
state laws regarding foreclosure. This paper extends the existing literature on foreclosure
by using a state-border methodology to measure the impact of differences in state
foreclosure procedures in the prime and subprime segments of the mortgage market,
separately. The results show that lender-favorable foreclosure laws are associated with
more mortgage originations and more applications in the subprime market. Foreclosure
differences have a stronger effect in the subprime market than in the prime market;
lender-favorable laws increase the market share of loans originated by subprime lenders.
This study also finds that strong anti-predatory lending laws and slow foreclosure
procedures are associated with less subprime activity.
This is the first study of foreclosure laws and mortgage lending to disaggregate the
effect of foreclosure procedures on low and high risk loans. Both the empirical results
and a simple model of lending risk suggest that this disaggregation is important. Because
subprime loans carry a higher risk of default, differences in foreclosure procedures have
a more pronounced impact on the value of subprime loans at the time of origination.
J Real Estate Finan Econ (2014) 49:303–328
Q. Curtis (*)
University of Virginia School of Law, 580 Massie Road, Charlottesville, VA 22903, USA