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The dark side of sunshine: Regulatory oversight and status quo bias

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  • Michael Collins, J.
  • Urban, Carly

Abstract

As the mortgage foreclosure crisis accelerated in the U.S. in the late 2000s, state-level policymakers implemented measures designed to protect consumers and stem the tide of foreclosures. One form of policy was simply to require lenders to report on foreclosure prevention activities. Such policies represented a shift from the status quo for mortgage loan servicing firms operating under incomplete information—doing nothing with non-paying loans while waiting for more information to be revealed—to either foreclosing on the borrower or offering the borrower a modification of loan terms. Using a difference-in-difference-in-differences empirical strategy, we exploit one policy implemented in Maryland for a subset of mortgage servicers and find evidence that firms perform more loan modifications, as well as file more foreclosures. Increasing foreclosure filings was contrary to the intent of the policy, suggesting that policymakers should be aware of how firms exhibit systematic biases, much like individuals.

Suggested Citation

  • Michael Collins, J. & Urban, Carly, 2014. "The dark side of sunshine: Regulatory oversight and status quo bias," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 470-486.
  • Handle: RePEc:eee:jeborg:v:107:y:2014:i:pb:p:470-486
    DOI: 10.1016/j.jebo.2014.04.003
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    Cited by:

    1. Collins, J. Michael & Urban, Carly, 2018. "The effects of a foreclosure moratorium on loan repayment behaviors," Regional Science and Urban Economics, Elsevier, vol. 68(C), pages 73-83.
    2. M. Lundholm, 2021. "Compensation and Socio-Economic Status of Borrowers in Foreclosure: Evidence from Swedish Micro-data," Journal of Consumer Policy, Springer, vol. 44(1), pages 95-116, March.
    3. Sandler, Ryan, 2023. "Aligning incentives: The effect of mortgage servicing rules on foreclosures and delinquency," Regional Science and Urban Economics, Elsevier, vol. 102(C).

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    More about this item

    Keywords

    Status quo bias; Loss aversion; Mortgage foreclosure;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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