PUBLIC AND PRIVATE RESPONSES TO DEFAULT AND FORECLOSURE

This dissertation focuses on responses to mortgage default and foreclosure. Foreclosures generate negative spillover effects on surrounding households and are a costly process for the borrower and lender. As a result, lenders and governments attempt to minimize the costs due to foreclosure. Lenders identify borrowers likely to self-cure, or cure without lender intervention, in order to reduce costs while governments place limits on foreclosures and monitor to upkeep of bank owned REO. This dissertation first examines the effect of a private form of governance, Homeowner’s Associations, on foreclosure spillovers. Using a border-discontinuity design to study foreclosures inside and outside HOAs, I find that foreclosures occurring inside HOAs generate fewer spillovers. In the second essay, I study lender reactions to defaulters signaling a likelihood of curing the delinquency. Utilizing a multinomial logit model, results show that lenders strategically delay acting on delinquent loans of borrowers signaling self-cure via payments while delinquent. Policies extending foreclosure timelines are also studied and I find that the costs of these policies are borne by the lender.