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Did Bankruptcy Reform Cause Mortgage Defaults to Rise?

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  • Wenli Li
  • Michelle J. White
  • Ning Zhu
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    Abstract

    Homeowners in financial distress can use bankruptcy to avoid defaulting on their mortgages, since filing loosens their budget constraints. But the 2005 bankruptcy reform made bankruptcy less favorable to homeowners and therefore caused mortgage defaults to rise. We test this relationship and find that the reform caused prime and subprime mortgage default rates to rise by 23% and 14%, respectively. Default rates rose even more for homeowners who were particularly negatively affected by the reform. We calculate that bankruptcy reform caused mortgage default rates to rise by one percentage point even before the start of the financial crisis. (JEL D14, G01, G21, K35)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.3.4.123
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

    Volume (Year): 3 (2011)
    Issue (Month): 4 (November)
    Pages: 123-47

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    Handle: RePEc:aea:aejpol:v:3:y:2011:i:4:p:123-47

    Note: DOI: 10.1257/pol.3.4.123
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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Michelle J. White & Ning Zhu, 2010. "Saving Your Home in Chapter 13 Bankruptcy," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 39(1), pages 33-61, 01.
    2. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    3. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 307-362, February.
    4. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
    5. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    6. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 42(2), pages 809-30, October.
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    Cited by:
    1. Shawn M. Rohlin & Amanda Ross, 2014. "State Bankruptcy Law and Entrepreneurship : Evidence from a Border Analysis," Working Papers 14-12, Department of Economics, West Virginia University.
    2. Mikhed, Vyacheslav & Scholnick, Barry, 2014. "Financial benefits, travel costs, and bankruptcy," Working Papers 14-18, Federal Reserve Bank of Philadelphia.
    3. Wenli Li & Ishani Tewari & Michelle J. White, 2014. "Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?," NBER Working Papers 19952, National Bureau of Economic Research, Inc.
    4. Amanda Ross & Shawn Rohlin, 2013. "State Bankruptcy Law and Entrepreneurship: Evidence from a Border Analysis," ERSA conference papers ersa13p253, European Regional Science Association.
    5. Wenli Li & Ishani Tewari & Michelle White, 2014. "Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?," CESifo Working Paper Series 4722, CESifo Group Munich.

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