In a recent paper with Gene Amromin, Zahi Ben-David, and Serdar Dinc, I focused on this specific question: whether banks delayed foreclosure initiation on delinquent mortgages in the districts of House Financial Services Committee members during 2009–10 when the Dodd-Frank Act was being debated. We used institutional details of the US Congress in our test design. For example, given the importance of seniority in Congressional committees, incumbents tend to stay on the same committee for multiple terms. Hence, most members made the decision to be on the Financial Services Committee long before the financial crisis. The foreclosure process on delinquent loans starts only when lender—or its agent, the loan servicer—takes explicit action; therefore, the start of the foreclosure process is largely discretionary and can be delayed.
We found that mortgage-servicing banks did indeed delay the start of foreclosures on delinquent loans if those loans were located in the electoral districts of House Financial Services Committee members. Importantly, there was no difference in delinquency rates in committee districts so this differential delay cannot be attributed to servicers’ capacity constraints under a large volume of delinquent loans. These results are robust to many loan- and location-specific controls, some of which are time-varying (e.g., zip code–level house price changes), as well as any state-specific time effects.
The average time for foreclosure starts in non-committee districts is about 12 months, taking into account the right-censoring at the sample end. In committee districts, however, this average is about half a month longer. Based on the foreclosure cost estimates from the literature and using only the aggregate value of delinquent loans in our sample, we conservatively estimate the direct cost of delay to lenders to be about $30 million. Although this cost may be small in the context of the mortgage market, it should be judged relative to other political actions by the large banks, as I mention them above. After all, the importance of banks’ political activities is not captured by the direct impact of their cost on bank earnings but rather through their potential to influence the political process.
Delaying foreclosure starts is a novel channel for banks to influence the political process. Despite the similarities of its cost to the lobbying expenses by these servicers, there are also differences compared to lobbying and making campaign contributions. By law, lobbying expenditures cannot be channeled to politicians’ campaigns. These delays, on the other hand, directly benefit the constituents of committee members. Campaign contributions can, of course, be used in the politicians’ campaigns but the foreclosure delays may be able to target the politicians’ voters even more precisely than some of the campaigning paid for by contributions.
We verified that our results are not spurious through a variety of tests. As placebo tests, we checked the membership in the Transportation and Infrastructure and Defense committees and find no link between membership in either of those two committees and the timing of foreclosures. We also did not find any effect of the Financial Services Committee membership in the earlier years when foreclosures did not attract as much attention.
To address the concerns that legislators may self-select into the Financial Services Committee based on the delinquency rates of their constituents, we checked the robustness of our results by restricting our sample to legislators who were elected to the House and to the Financial Services committee before 2005, well before the onset of the crisis.