Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence
AbstractIn this paper we develop a theory where homeowners make joint decisions in financial distress as whether to file for bankruptcy or default on their mortgages. The theory models explicitly institutional details, the federal bankruptcy law and the state foreclosure laws, that govern the two default events separately and their interactions. In particular, we derive regions (defined by households asset, liability, and income positions) where homeowners default on both loans, on one of them, and on neither of them. We then test our model using a unique dataset where we match individual credit bureau information with their mortgage loan level information. We find that the data provide support to our theory. Furthermore, for our sample period, liquidity considerations contributed more to mortgage default than to bankruptcy filing. We also find significance difference between prime and subprime loans.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1038.
Date of creation: 2011
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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- Paul S. Willen & Adam Hale Shapiro & Kristopher Gerardi, 2008.
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10-13, Federal Reserve Bank of Philadelphia.
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- Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
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- Donghoon Lee & Wilbert van der Klaauw, 2010. "An introduction to the FRBNY Consumer Credit Panel," Staff Reports 479, Federal Reserve Bank of New York.
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