Does Mortgage Deregulation Increase Foreclosures? : Evidence from Cleveland

The late-2000s financial crisis has re-ignited a debate about the impact of regulating consumer mortgage markets. This paper examines how a court-mandated repeal of a home mortgage regulation in Cleveland a effected home foreclosures. To distinguish the effect of deregulation from confounding factors, I use a difference-in-difference research design that compares loan outcomes within and outside the city limits of Cleveland before and after the repeal of the law. Results indicate that deregulation caused a 49 percent increase in early foreclosures while it did not increase total loan originations, implying that bad loans as a share of overall loans increased substantially. Deregulation also increased the number of high-interest loans by 30 percent, increased loans made by subprime lenders by 40 percent. These results are robust to the window of time examined before and after deregulation, as well as to examining only areas on the boundary of the city limits. Moreover, placebo tests reveal there was no divergence in loan quality prior to the Cleveland repeal, and that there was no evidence of a similar divergence in Pittsburgh at the time of repeal in Cleveland