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Litigation and the Mortgage Market: Evidence from Spain

Rok Spruk, Fernando Gómez Pomar and Adrián Segura Moreiras

We examine how litigation affects the functioning of the mortgage market. To this end, we estimate the impact of rising litigation rates on the mortgage access and the overall market capitalization of mortgages for a panel of 50 Spanish provinces in the period 2008-2016. Our identification strategy exploits rich dynamics of past mortgage access and value as a potential source of endogeneity and reverse causation that could possibly taint the relationship between litigation and the mortgage market. Our dynamic panel-level fixed-effects estimates suggest that rising litigation rates across Spain tend to suppress mortgage access and have an adverse effect on the mortgage market capitalization. Our preferred specifications imply that 1 percentage point increase in litigation rate tends to reduce province-level mortgage access by 1.7 percent and dampen the province-level market value of mortgages by 1.4 percent after three years. The underlying estimates do not seem to be driven by high-leverage provinces such as Madrid and Barcelona, or by provinces with a favorable taxation on mortgage loans, such as the Basque provinces. We further examine some policy channels through which litigation may impact the mortgage market and find that some policy changes such as the code of good banking practices tend to reduce litigation whilst others have an opposite impact. Over time, civil courts have a tendency to become more effective in solving disputes, probably because of the repeated nature of mortgage-related suits that are brought as individual cases and are not aggregated in collective litigation.

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