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Atlanta Fed Working Papers


Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process

Kristopher Gerardi, Lauren Lambie-Hanson, and Paul S. Willen
Working Paper 2011-16a
Revised August 2012

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We evaluate the effects of laws designed to protect borrowers from foreclosure. We find that these laws delay but do not prevent foreclosures. We first compare states that require lenders to seek judicial permission to foreclose with states that do not. Borrowers in judicial states are no more likely to cure and no more likely to renegotiate their loans, but the delays lead to a build-up in these states of persistently delinquent borrowers, the vast majority of whom eventually lose their homes. We next analyze a "right-to-cure" law instituted in Massachusetts on May 1, 2008. Using a difference-in-differences approach to evaluate the effect of the policy, we compare Massachusetts with neighboring states that did not adopt similar laws. We find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers.

JEL classification: G21, K11, R31

Key words: foreclosure, mortgage, judicial, power of sale, right to cure


The authors thank Ben Castleman, Jane Dokko, Derek Hyra, Richard Murnane, Karen Pence, Bob Triest, John Willett, two anonymous referees, and audiences at the Federal Reserve Bank of New York, the Massachusetts Institute of Technology, Harvard University, the Association of Collegiate Schools of Planning, the Association for Public Policy Analysis and Management, and the American Real Estate and Urban Economics Association for helpful comments and suggestions and Elizabeth Murry for inspired editorial assistance. The discussion of foreclosure law in Section 2 benefited from many long conversations with Zachary Kimball and Richard Howe Jr. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Kristopher Gerardi, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street N.E., Atlanta, GA 30309, 404-498-8561, kristopher.gerardi@atl.frb.org; Lauren Lambie-Hanson, Massachusetts Institute of Technology, Department of Urban Studies and Planning, 77 Massachusetts Avenue, Room 7-346, Cambridge, MA 02139, lslh@mit.edu; or Paul S. Willen, Federal Reserve Bank of Boston, Research Department, 600 Atlantic Avenue, Boston, MA 02210, 617-973-3149, paul.willen@bos.frb.org.

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