Hierarchical Modeling of Residential Default: Does State Level Foreclosure and Predatory Lending Legislation Limit 'Bad' Loans?

Abstract

A national loan level data set, aggregated at the zip code is used to examine the elasticity of default relative to local demographic characteristics and state level legislation regulating foreclosure procedures and predatory lending. We also illustrate the merit of using a form of hierarchical linear modeling when comparing loan performance at the national level. We observe significant variation in the rate of foreclosure across states. Those states imposing higher temporal and financial costs on financial institutions exhibit lower default levels controlling for loan and local conditions. State level legislative influences provide a foundation for discussion of national level policy that further regulates predatory lending and financial institution foreclosure activities. This is one of many proposed directives for addressing the current mortgage challenges and future borrower lender interaction during potential default.