Collateral Enforcement and the Secondary Market

Abstract

This dissertation investigates the role of the secondary market in the enforcement of a creditor's security interest. In the first chapter, I examine how creditors respond to ex-post higher foreclosure costs. I find that when repossessing collateral becomes costly, creditors choose to sell their delinquent debt on the secondary market rather than renegotiate with borrowers. Only when repossession becomes prohibitively expensive, thus impeding sale, do creditors offer forbearance. These results highlight a novel channel to explain the lack of mortgage renegotiation, namely, the very presence of a robust secondary market. Subsequent chapters further explore this relationship. In the second chapter, I study how banks respond to riskier collateral enforcement ex-ante. I find that banks exposed to enforcement risk reduce lending for portfolio loans, which are precisely those loans that banks are liable to enforce. In the third chapter, I study how creditors respond to the delayed sale of delinquent debt. I find that suspending the early sale of delinquent debt reduces the incidence of forbearance, increases foreclosures, and limits creditor incentives to cure loans.