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Foreclosure Laws May Add POS Cost

A study by a Federal Reserve System economist suggests that states with "defaulter-friendly" foreclosure laws impose costs on borrowers at the time of loan origination.

Using data from adjacent census tracts that happen to be in different states, Fed economist Karen Pence found that the average loan size at origination was 4% to 6% lower in states where foreclosure laws are protective of borrowers, suggesting that these consumer protection laws impose costs on borrowers at the time of loan origination.

In her study, Ms. Pence noted that losses on foreclosures typically range from 30% to 60% of the outstanding loan balances because legal fees, foregone interest and property expenses usually exceed the revenue gained from repossessing and selling the property.

State foreclosure laws also affect losses. In some states, the law allows for quick, low-cost procedures, while other states provide substantial benefits for borrowers and correspondingly large costs on lenders, the study said.

"If lenders pass the higher associated costs onto borrowers, the laws may have the unintended consequence of reducing the supply of mortgage credit," Ms. Pence said in the study.

The length of the foreclosure process is a key factor in determining lender costs, she noted, citing another study that suggests a 16-month delay in the foreclosure process increased costs by over $13,500 for a $100,000 loan.

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