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The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown

Author

Listed:
  • Jacelly Cespedes
  • Carlos Parra
  • Clemens Sialm

Abstract

Mortgage cramdown enabled bankruptcy judges to discharge the underwater portion of a mortgage in a chapter 13 bankruptcy until the Supreme Court disallowed this practice in 1993. We investigate the impact of mortgage cramdown on household distress exploiting the random assignment of cases to judges. The impact of bankruptcy protection on foreclosures is reduced by more than half after the Supreme Court disallowed cramdown. Our results suggest that large principal reductions considerably decrease homeowners’ distress by reducing debt overhang.

Suggested Citation

  • Jacelly Cespedes & Carlos Parra & Clemens Sialm, 2026. "The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown," The Review of Financial Studies, Society for Financial Studies, vol. 39(2), pages 518-561.
    • Handle: RePEc:oup:rfinst:v:39:y:2026:i:2:p:518-561.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf104
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    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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