Title

Essays on the Impact of State Policies on Mortgage Finance

Date of Award

5-2013

Degree Type

Dissertation

Embargo Date

5-22-2013

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

Advisor(s)

Stuart S. Rosenthal

Keywords

Mortgage markets, Bankruptcy homestead exemption

Subject Categories

Economics

Abstract

This dissertation consists of two essays that look at the impact of state policies on mortgage markets. Both essays examine how and the degree to which states that provide more borrower-friendly provisions versus more lender-friendly provisions may exhibit different outcomes in the mortgage market. The first essay examines the impact of state bankruptcy homestead exemption and foreclosure laws on both mortgage demand and mortgage supply. The second essay analyzes how state bankruptcy homestead exemption and foreclosure laws affect different types of mortgages that are originated.

The first essay examines the impact of state bankruptcy homestead exemption on size of the loan requested, size of the loan originated, and whether the loan application is accepted or rejected. The key source of variation used for identification is differences in the level of bankruptcy homestead exemption provision across state and over time. To estimate the effect of the provision, I compare mortgage activities in adjacent census tracts on opposite sides of state boundaries in the 55 urban areas that cross state borders. There are three key results. First, holding the loan-to-value ratio constant, a more generous homestead exemption encourages borrowers to buy more housing and take out larger mortgages. Second, holding house value constant, a more generous homestead exemption discourages mortgage borrowing and results in more home equity. Third, benefits of the homestead exemption outweigh the costs of it to mortgage lenders.

The second essay analyzes the impact of state bankruptcy provisions and foreclosure laws on different types of mortgages that are available to prospective borrowers. The state legislations govern the rights of lenders and borrowers during legal proceedings and therefore impact on lenders' exposure to credit risks. The degree to which lenders would respond to those state legislations by adjusting underwriting standards may differ across mortgage products with different level of risks. Focusing on high-risk segment of the mortgage market, this paper looks for evidence that lenders tend to respond to higher-risk environment by modifying the types of loans that are originated. Three key findings are obtained using a similar border method as in the first essay. First, higher-risk loans are less likely to be originated in a state with judicial foreclosure requirement. Second, conventional prime loans are more likely to be originated in a state with larger homestead exemption. Third, FHA and subprime loans share a very similar clientele and are close substitutes especially for home purchase loans.

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