Laws governing the foreclosure process can have direct consequences on the costs of
foreclosure and could therefore affect lending decisions. We exploit the heterogeneity in the judicial requirements across U.S. states to examine their impact on banks’ lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shifts the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans that are ineligible for GSE guarantees.   They also shed light on a significant indirect cross-subsidy by the GSEs to borrower-friendly states that have been overlooked thus far.