IMF Researchers on the Impact of Foreclosure Laws on the Supply of Credit

Jihad Dagher and Yangfan Sun, both of the International Monetary Fund, have written Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws.  Here's the abstract:

Laws governing the foreclosure process, which vary across jurisdictions, have direct consequences on creditors’ losses from borrower default, and thus, could potentially affect lending decisions. Our empirical strategy exploits a quasi-experimental setting using loan-level data to examine the impact of these laws on banks’ propensity to reject a loan application. Our analysis takes into consideration the variation in the banking landscape across state borders, present even within contiguous counties, an aspect that has been overlooked in the extant literature. We find that judicial foreclosure and the prohibition of recourse reduce the supply of credit mainly for jumbo (non-conforming) loans, i.e., loans that are ineligible to be guaranteed by the GSEs. These results are robust to a battery of robustness tests. Our findings illustrate the consequences of foreclosure laws, and more generally borrower protection laws, on credit supply. They also shed light on an indirect subsidy by the GSEs to borrower-friendly states.