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Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence

  • Michelle White

    (Department of Economics, University of California at San Diego)

  • Wenli Li

    (Department of Research, Federal Reserve Bank of Philadelphia)

In 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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File URL: https://www.economicdynamics.org/meetpapers/2011/paper_1038.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1038.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1038
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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  1. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
  2. Michelle J. White & Ning Zhu, 2008. "Saving Your Home in Chapter 13 Bankruptcy," NBER Working Papers 14179, National Bureau of Economic Research, Inc.
  3. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis & Glennon & Robert Hunt, 2010. "What "triggers" mortgage default?," Working Papers 10-13, Federal Reserve Bank of Philadelphia.
  4. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
  5. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
  6. Donghoon Lee & Wilbert van der Klaauw, 2010. "An introduction to the FRBNY Consumer Credit Panel," Staff Reports 479, Federal Reserve Bank of New York.
  7. Wenli Li & Michelle J. White & Ning Zhu, 2010. "Did Bankruptcy Reform Cause Mortgage Default to Rise?," NBER Working Papers 15968, National Bureau of Economic Research, Inc.
  8. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
  9. Wenli Li & Michelle J. White, 2009. "Mortgage Default, Foreclosure, and Bankruptcy," NBER Working Papers 15472, National Bureau of Economic Research, Inc.
  10. 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, vol. 125(1), pages 307-362, February.
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