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To change or not to change: the impact of the law on mortgage origination

Ana Isabel Sá
Publication Year 
JEL Code 
E43 - Determination of Interest Rates; Term Structure of Interest Rates
G21 - Banks; Other Depository Institutions; Mortgages
G28 - Government Policy and Regulation
K25 - Real Estate Law
K35 - Personal Bankruptcy Law
Differences in mortgage law have significant effects on loan characteristics at origination. Borrower-friendly laws impose higher costs and risks for lenders and, thus, induce effects on mortgage pricing and leverage. However, not all borrower-friendly laws have the same effects. This finding is established using loan-level data for the U.S. mortgage market between 2001 and 2011. Judicial foreclosure requirements imply higher mortgage interest rates due to higher recovery costs and activate the price channel. Recourse restrictions imply higher loan collateralization to compensate for the fewer recovery opportunities and activate the collateral channel.
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