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Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence

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  • Michelle White

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

  • Wenli Li

    (Department of Research, Federal Reserve Bank of Philadelphia)

Abstract

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.

Suggested Citation

  • Michelle White & Wenli Li, 2011. "Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence," 2011 Meeting Papers 1038, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1038
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    File URL: https://economicdynamics.org/meetpapers/2011/paper_1038.pdf
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    References listed on IDEAS

    as
    1. Wenli Li & Michelle J. White & Ning S. Zhu, 2010. "Did bankruptcy reform cause mortgage default rates to rise?," Working Papers 10-16, Federal Reserve Bank of Philadelphia.
    2. Michelle J. White & Ning Zhu, 2010. "Saving Your Home in Chapter 13 Bankruptcy," The Journal of Legal Studies, University of Chicago Press, vol. 39(1), pages 33-61, January.
    3. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    4. Wenli Li & Michelle J. White & Ning Zhu, 2011. "Did Bankruptcy Reform Cause Mortgage Defaults to Rise?," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 123-147, November.
    5. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    6. 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.
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