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The paper explores the effects of mandatory third-party review of mortgage contracts on the terms, availability, and performance of mortgage credit. Study is based on a legislative experiment in which the State of Illinois required 'high-risk' mortgage applicants acquiring or refinancing properties in 10 specific zip codes to submit loan offers from state-licensed lenders to review by HUD-certified financial counselors. The paper documents that the legislation led to declines in both the supply of and demand for credit, with state licensed lenders and lower-quality borrowers disproportionately exiting the affected area. Controlling for the salient characteristics of the remaining borrowers and lenders, it's found that the legislation succeeded in reducing ex post default rates among counseled borrowers by 3 to 4 percentage points (about 30% decline).
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