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Did bankruptcy reform lead to looser mortgage lending standards? Evidence from the U.S. mortgage market 2000-2007

Author

Listed:
  • Prajakta Bhide

    (New York University)

  • Lucia Fiorito

    (New York University)

  • Zachary Noteman

    (New York University)

  • Kunal Sawardekar

    (New York University)

Abstract

This paper seeks to find an exogenous cause for deterioration in mortgage lending standards since 2005 that contributed to the subprime mortgage crisis in the U.S. We find that the new means test provision in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 was such an exogenous shock in the mortgage market. We show that the means test, which makes Chapter 7 bankruptcy unavailable to relatively better off borrowers, caused a shift in the supply of mortgage credit from better off borrowers to relatively poorer borrowers. Simultaneously, we found borrowers being charged higher interest rates, for all classes of income. Our findings imply that BAPCPA may be a contributing factor toward the deterioration of lending standards in the U.S. mortgage market.

Suggested Citation

  • Prajakta Bhide & Lucia Fiorito & Zachary Noteman & Kunal Sawardekar, 2010. "Did bankruptcy reform lead to looser mortgage lending standards? Evidence from the U.S. mortgage market 2000-2007," Ensayos de Política Económica, Departamento de Investigación Francisco Valsecchi, Facultad de Ciencias Económicas, Pontificia Universidad Católica Argentina., vol. 1(4), pages 88-107, Octubre.
    • Handle: RePEc:atw:epecon:v:1:y:2010:i:4:p:88-107
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    References listed on IDEAS

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    More about this item

    Keywords

    Bankruptcy; means test; mortgage default; lending standards;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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