Since President Trump took office in 2016, there has been movement toward deregulation and the reduced enforcement of existing regulations in many sectors, including the mortgage-finance industry. This has left an uncomfortable gap for those who believe that this trend leaves borrowers—and the larger economy—vulnerable to the avarice of lenders. New research from Brian Feinstein, Wharton professor of legal studies and business ethics, shows states can step in to fill the gap through a mechanism called judicial foreclosure, which offers some legal protections and oversight to borrowers facing foreclosure.
Feinstein argues that there is “a gap in regulation or a trend towards deregulation on the federal level. The deregulatory shift mirrored the change in administration. With the Trump administration coming in, federal regulators eased up on mortgage lenders. The Consumer Financial Protection Bureau—the federal agency that’s primarily responsible for enforcing consumer finance laws—cut their enforcement activities by around 80%.”
There are benefits and consequences with judicial foreclosures for both borrowers and lenders. “For borrowers, the primary benefit is that you get judicial supervision to make sure the lender meets all the requirements to foreclose. To the extent that judicial foreclosure slows down the foreclosure process, that’s going to raise the cost to lenders. Maybe lenders pass on these costs in the form of higher interest rates to borrowers, in which case the cost to the lender is taken on by the borrowers. Or maybe they adopt a more conservative lending posture, originating more prime loans, which are less likely to end up in foreclosure, and fewer high-risk subprime loans. That’s what my research examines.”
Read more at Knowledge@Wharton.