Three essays on mortgage foreclosures

Abstract

This thesis is made up of three papers that investigate several aspects of the current mortgage foreclosure crisis. The first paper examines a 90-day "right-to-cure" policy adopted in Massachusetts to slow the foreclosure process and encourage borrowers and lenders to reach agreements for mortgage modifications. Using a difference-in- differences framework, I show that borrowers who were given more time in the foreclosure process were no more likely to receive mortgage modifications or cure their mortgage defaults than were borrowers who did not experience the state-mandated foreclosure delay. The second paper focuses on mortgage distress and property maintenance. Studies of foreclosure externalities have overwhelmingly focused on the impact of forced transactions on the sale prices of nearby properties, typically finding modest evidence of foreclosure spillovers. However, many quality-of-life issues posed by foreclosures may not be reflected in the prices of nearby sales. This paper uses new data from Boston, Massachusetts on constituent complaints and requests for public services made to City government departments, matched with sale transactions, mortgage performance, and multiple listings service data to examine the timing and channels of foreclosure externalities. I find evidence that property conditions suffer most while homes are bank-owned, though reduced maintenance is also common earlier in the foreclosure process. Since short sales prevent bank ownership entirely, they should result in fewer neighborhood disamenities than foreclosures. The third and final paper, co-authored with Lynn M. Fisher (UNC-Chapel Hill) and Paul S. Willen (Federal Reserve Bank of Boston), explores the impact of foreclosures on the sale prices of neighboring properties in Boston. We find that the prices of condominium units are most susceptible to foreclosure spillovers, though condo sellers experience notable downward pressure on sale prices only when the foreclosures occur within their own condo associations. The effect is most severe when the foreclosures occur within the same building.