The purpose of this paper is to examine the relationship between real estate foreclosures, state-level corruption and financial stability in US credit unions. Using a large sample covering the period 2006–2021, the study investigates how foreclosures affect credit union stability and whether corruption influences foreclosure activity. It further explores how different state foreclosure laws shape these relationships. By focusing on credit unions, an important yet under-researched segment of the financial system, the paper aims to provide new insights into the macro-financial and institutional factors associated with foreclosures.
The study uses a panel data set of 2,290 US credit unions over the period 2006–2021. Fixed-effects regressions are used to examine the impact of foreclosures on credit union stability, measured by the Z-score and the association between state-level corruption and foreclosure activity. The analysis incorporates credit union–specific controls, macroeconomic variables and quarter fixed effects. Subsample analyses are conducted based on foreclosure laws and pre- and post-crisis periods. Robustness tests include alternative variable definitions, instrumental variable techniques and additional state-level controls.
The authors find that foreclosures have a negative effect on credit union stability, especially in states without borrower-friendly foreclosure laws. State-level corruption shares a negative relationship with foreclosures in a more stringent regulatory framework after the crisis, suggesting corruption’s power to “grease the wheels” and help credit unions reduce foreclosures. Finally, in states where the judicial foreclosure process is required, credit unions are more stable and have fewer foreclosures, while the opposite holds in states with non-recourse mortgages.
This paper offers several novel contributions. It provides the first comprehensive analysis of foreclosures within the US credit union sector, highlighting their implications for financial stability. The study also introduces a new perspective on corruption by showing that, under stringent post-crisis regulation, corruption may reduce foreclosures by “greasing the wheels.” In addition, it enriches the foreclosure literature by jointly examining institutional quality, regulatory frameworks and stability outcomes. By incorporating foreclosure laws and state-level mental health conditions, the paper delivers policy-relevant insights into the broader social and financial consequences of foreclosures.
