The impact of mortgage foreclosure laws on secondary market loan losses.

摘要

In each state there are laws that govern the mortgage foreclosure process. These laws determine the rights in foreclosure that are given to borrowers and lenders. This research intends to determine whether the differences in mortgage foreclosure laws affect the probability of mortgage default and the resulting severity of loss to the lender once a default occurs. This research will contribute to the policy debate regarding the actual costs of the present legal environment by quantifying the impact of the foreclosure laws across states. The policy debate has focused on whether foreclosure laws create differences in costs and whether lenders and the secondary markets price for any differences.;The major result of this research shows that there are differences across states that are due to the legal environment even after controlling for many other factors. States with consumer protection laws have higher than average costs while states with lender protection laws have lower than average costs. This result implies that if average pricing of mortgage interest rates occurs then there is a cross subsidization across states. Overall, the results imply that with average cost pricing, a ;This research uses a large comprehensive sample of loans from Fannie Mae to determine whether there are differences in loan loss severity that can be explained by state foreclosure laws. A two step procedure is used to isolate the impact of foreclosure laws on lender loan losses. The first step is to isolate the impact of foreclosure laws on the likelihood of default. The second step models the impact of foreclosure laws on loss severity given default. In each equation, independent control variables such as the original loan to value ratio, property type, occupancy status at origination and at foreclosure, origination year, loan size, interest rate, type of disposition, length of time to disposition and local economic conditions are used.