Foreclosures In Ohio: Does Lender Type Matter?

1. Foreclosures In Ohio: Does Lender Type Matter? Emre Ergungor Federal Reserve Bank of Cleveland

2. 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

3. The Question • Does the way lenders are regulated matter for delinquency and foreclosure rates? • How does the paper define “the way lenders are regulated”? • Local Depositories • Non-local Depositories • Less-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

4. 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.

5. 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.

6. Testable Hypotheses • If 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 depositories • If 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

7. Method I • Cross-sectional analysis (2SLS) • t: 1999 to 2004 • Caution: • Some variables are ‘problematic’

8. Method II • Arellano-Bond first-differenced GMM

9. Estimation • Two methods • Dynamic panel • allows control of unobserved county-specific effects • accounts for auto-regressive dynamics • allows for explanatory variables that are not strictly exogenous • Cross-sectional analysis • potential bias in the dynamic panel that arises from the large number of instruments relative to the number of cross sections

10. Results • When 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.

11. Summary • The 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 paper • Less 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.