Redtape, Greenleaf: Creditor Behavior Under Costly Collateral Enforcement

Abstract

This paper studies how creditors behave under costly collateral enforcement. I exploit quasi-experimental variation in foreclosure costs generated from Maine's 2014 Greenleaf judgement. I estimate that that the foreclosure rate dropped by over 23%. Furthermore, I find that borrowers did not forgo mortgage repayment when provided the opportunity to repay. Instead, the self-cure rate increased by 30%. Finally, instead of modifying mortgages or negotiating a short sale, I find that 46% of the loans that forgo foreclosure are ultimately sold off by creditors. I show that this secondary market breaks down when foreclosure costs become prohibitively expensive, at which point servicers provide forbearance to a subset of loans to prevent worsening delinquency.