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 examine 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 defaulter-friendly states; this result suggests that defaulter-friendly laws impose material costs on borrowers at the time of loan origination.

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© 2006 The President and Fellows of Harvard College and the Massachusetts Institute of Technology
2006
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