Judge Dread: Court severity, repossession risk and demand in mortgage and housing markets

We study the impact of borrower protection on mortgage and housing demand using variation in the likelihood that houses are repossessed coming from heterogeneity in preferences of local judges. We develop a framework that provides conditions to identify the impact of repossession risk on housing and credit demand – holding supply fixed. Empirically, we exploit exogenous variation in risk created by boundaries of courts’ catchment areas. We find that one standard deviation decrease in borrower protection decreases borrowing and house prices by 4.5%.