MORTGAGE LENDING REGULATORY ARBITRAGE: LESSONS FROM LENDER CONCENTRATION AND LENDER FAILURES IN THE U.S.
HUANG WEIFEN SERENA
HUANG WEIFEN SERENA
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Abstract
Mian and Sufi (2009) show a strong link between the geographic concentration of mortgage defaults and credit supply. In this study, I further examine this link with focus on the cross-state variation in mortgage licensing requirements and borrower rights. Specifically, I examine the economic impact that licensing requirements and foreclosure laws played in excess credit provision, deteriorating lending practices and ultimately in lender failures and house price declines between 2008 and 2009. I find that lenders concentrated in states with weak licensing regulations and lender-friendly foreclosure laws, which could be partially responsible for excess credit and home price run-up. My findings also show that states with a higher concentration of lenders experienced more significant home price declines and higher lender failure rates. At both the state and the lender level analyses, I find that weak licensing regulations are also associated with the issuance of larger loan volumes and higher rates of loan securitization by lenders, which reflect a deterioration of lending standards. The excessive risks undertaken by lenders through high-risk lending elevates their probability of defaults and hence explains the higher lender failure rates in these states. Overall, my results provide some evidence for how the variation in state regulations needs to be addressed to better control and monitor mortgage lending in the U.S.
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2012
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