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| Using the adoption of Zombie Property Law (ZL) across several US states we show that increased lender accountability in the foreclosure process affects mortgage lending decisions and standards. Difference-in-differences estimations using a state border design show that ZL incentivizes lenders to screen mortgage applications more carefully: they deny more applications and impose higher interest rates on originated loans especially risky loans. In turn these loans exhibit higher ex-post performance. ZL also affects lender behavior after borrowers become distressed causing them to strategically keep delinquent mortgages alive. Our findings inform the debate on policy responses to foreclosure crises. |
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