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Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?

Author

Listed:
  • Wenli Li
  • Ishani Tewari
  • Michelle White

Abstract

We assess the credit market impact of allowing mortgage “strip-down” as a foreclosure-prevention measure, where strip-down reduces the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 13 bankruptcy. Our identification is provided by a series of U.S. court decisions that introduced strip-down in parts of the U.S. and a Supreme Court ruling that abolished it. We find that the Supreme Court decision led to a small, short-term reduction in mortgage interest rates and a small, short-term increase in mortgage approval rates, but no long-term effects, and the circuit court decisions did not consistently affect mortgage terms. These results suggest that strip-down would be an effective foreclosure-prevention program, because it would have only small and transient effects on the supply of mortgage loans.

Suggested Citation

  • 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.
    • Handle: RePEc:ces:ceswps:_4722
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    References listed on IDEAS

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    1. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 217-251.
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    More about this item

    Keywords

    mortgage; foreclosure; credit market; credit supply; strip-down;
    All these keywords.

    JEL classification:

    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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