Emre ErgungorFederal Reserve Bank of Cleveland

Foreclosures In Ohio: Does Lender Type Matter?

What is the Main Issue?“Deceptive lending practices [are common

among] minority homeowners who lack access to traditional banking services and rely disproportionately on finance companies and other less regulated lenders.”

National Consumer Law Center

The QuestionDoes the way lenders are regulated matter

for delinquency and foreclosure rates?How does the paper define “the way

lenders are regulated”?Local DepositoriesNon-local DepositoriesLess-Regulated Entities

For example: Ameriquest, Ameritrust, etc

Why Ohio?I have the number of foreclosure filings in

each county.

Regulated by FED, OCC, OTS, FDIC, or NCUA

Why should lender type matter?Federal regulation and supervision matter.The difference in delinquency/foreclosure

rates among counties is not about the way lenders are regulated. It could be about which lender is better informed

about the neighborhood and uses that information in its lending decision.

It could be about which lender depends upon third parties (brokers) who may have neglected their due diligence in order to generate volume.

The Alternative Hypothesis Suggests a Special Role for Local Depository Institutions

Local depository institutions may know their neighborhoods better than out-of-town lenders and less-regulated mortgage lenders because they constantly interact with consumers and businesses on both sides of their balance sheets by making loans and taking deposits.

Even in the absence of any informational advantage, local lenders may be less likely to foreclose on properties because of their ties to the community.

Caution: I cannot measure any of this but these could be factors affecting the significance of the results.

Testable HypothesesIf regulation matters, I expect to see

delinquencies and foreclosures increase with increasing market share of less-regulated entities.There should be no difference between local and

non-local depositoriesIf being a local lender matters, I expect to see

delinquencies and foreclosures increase with increasing market share of less-regulated entities and non-local depositories.There should be no difference between less-

regulated entities and non-local depositories

Method ICross-sectional analysis (2SLS)

t: 1999 to 2004

Caution:Some variables are ‘problematic’

1 2 2 2 2 1, , ,it it it it it itD f RegNL LReg Arm X

2 2 1 1, , ,it it it it it itF f RegNL LReg D X

Method IIArellano-Bond first-differenced GMM

1 2 2 2 2 2 1, , , ,it it it it it it itD f D RegNL LReg Arm X

,1 2 2 2 1 1, , , ,it it it it it it it itF f F Loan RegNL LReg D X

EstimationTwo methods

Dynamic panelallows control of unobserved county-specific effectsaccounts for auto-regressive dynamicsallows for explanatory variables that are not strictly

exogenousCross-sectional analysis

potential bias in the dynamic panel that arises from the large number of instruments relative to the number of cross sections

ResultsWhen non-local depositories and less-

regulated entities gain market share at the expense of local depositories, foreclosure rates tend to go up.

The negative economic impact of non-local depositories is larger than that of less-regulated entities but the difference is statistically insignificant in most years.

SummaryThe type of the financial institutions lending in a

county is a factor that influences the foreclosure rates.

The evidence does not support the view that federal regulation/supervision is important.

This result could mean many things, which I don’t address in this paperLess regulated lenders and non-local depositories may

have depended upon third parties (brokers) who may have neglected their due diligence in order to generate volume.

They may be more realistic about the deteriorating conditions in the housing market and more inclined to foreclose on the property to prevent it from falling into disrepair.