Review of Finance 2026

Regulating zombie mortgages

Jonathan Lee¹; Duc Duy Nguyen^2,3; Huyen Nguyen⁴

¹ Adam Smith Business School, University of Glasgow , Glasgow, · ² Durham University Business School, Durham University , Durham, · ³ Center for Responsible Banking and Finance, University of St Andrews , St Andrews, · ⁴ King’s Business School, King’s College London , London,

Abstract

Using the adoption of Zombie Property Laws (ZL) across several US states, we show that requiring lenders to maintain properties in the foreclosure process affects mortgage lending decisions and standards. Difference-in-differences estimations using a state border design show that ZL incentivizes lenders to screen mortgage applications more carefully: they deny more applications and impose higher interest rates on originated loans, especially risky loans. In turn, these loans exhibit higher ex post performance. ZL also affects lender behavior after borrowers become distressed, causing them to strategically keep delinquent mortgages alive. Our findings inform the debate on policy responses to foreclosure crises.

DOI

10.1093/rof/rfag008

Language

en

Sources

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