Wharton Public Policy Initiative Issue Briefs

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Proponents of robust mortgage finance regulation would do well to look to the states, and specifically to the regulatory effects of state-mandated judicial foreclosure. Judicial foreclosure, which is authorized in almost half of U.S. states, requires that lenders seeking to foreclose on a mortgage file an action in state court. This not only provides borrowers with a forum for holding lenders accountable for their behavior and obligations, but puts the onus on the lender to show that the requirements for foreclosure have been met. It also aids borrowers by delaying the foreclosure process and allowing them to remain in their homes for longer periods while in default. In this brief, Professor Brian Feinstein empirically examines the effects of judicial foreclosure on lender behavior and mortgage costs for consumers. The findings indicate that judicial foreclosure alters lender behavior in ways that are beneficial to borrowers, and that mirror regulatory goals. Lenders exhibit greater caution in loan-approval decisions and offer fewer subprime loans. These results are amplified for lower-income borrowers. Importantly, the costs imposed on lenders by judicial foreclosure do not appear to get passed on to borrowers in the form of higher rates.


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mortgage-finance regulatory framework, ex ante regulations, judicial foreclosure state, state foreclosure procedures, loan origination stage, ex post tort livability, robs-signing, back end regulation of mortgage lending, de facto judicial foreclosure states, truth-in-lending act, non-judicial foreclosure, rate and term refinances, lender behavior at front end, spill over costs, subprime products

State Foreclosure Law: A Neglected Element of the Housing Finance Debate