Does mortgage deregulation increase foreclosures? Evidence from Cleveland

• I used a court-mandated repeal in Cleveland, Ohio, as a natural experiment to quantify the effect of mortgage deregulation on annual percentage rates (APRs) and foreclosure rates.
• The estimation results suggest that APRs were 20% more likely to exceed the regulatory thresholds removed by the court order after the repeal, and the foreclosure rate increased by six percentage points to 20%.
• Findings are robust to subsamples of loans originated in a narrower window of time, in geographic areas close to or similar to each other.
• Falsifications show that the findings are not driven by a seasonal pattern or differential economic shocks.

This paper examines how relaxing a local anti-predatory lending law for mortgages affects foreclosures. The empirical evidence is drawn from a quasi experiment in Cleveland, Ohio, where the State Supreme Court repealed an ordinance that imposed lending restrictions on home mortgages of high annual percentage rates (APRs). Empirical evidence shows that observable loan and borrower characteristics were not affected by the repeal, nor did the overall originations appear to increase; yet the APRs were 20% more likely to exceed the regulatory thresholds that were nullified. Moreover, the foreclosure rate increased by six percentage points to 20%.