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Foreclosure and Bankruptcy--Policy Conclusions from the Current Crisis

  • Theresa Kuchler

    ()

    (Stanford University)

  • Johannes Stroebel

    ()

    (Stanford University)

The recent episode of rising consumer bankruptcy and increasing foreclosure rates has sparked a lively debate about how to best tackle the crisis in the U.S. housing market. This paper contributes to the debate by providing an explicit model of the interactions of households' decisions to declare Chapter 7 bankruptcy, and to enter into foreclosure. We construct a model to show that the interaction of bankruptcy exemption limits and mortgage regulation has an impact on the prevalence of bankruptcy and foreclosure. We use state-level data to show empirically that our model predictions are plausible. We argue that policy proposals that focus solely on one aspect of the twin-crisis are likely to be misguided. In particular, we show that in the short-run a switch from non-recourse mortgages to recourse mortgages may have little effect on foreclosures, but could dramatically increase the number of bankruptcies.

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File URL: http://www-siepr.stanford.edu/repec/sip/08-037.pdf
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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-037.

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Date of creation: Apr 2009
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Handle: RePEc:sip:dpaper:08-037
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  1. Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 646, Econometric Society.
  2. Todd C. Pulvino, 1998. "Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," Journal of Finance, American Finance Association, vol. 53(3), pages 939-978, 06.
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  8. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis.
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  10. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  11. Marina Pavan, 2003. "Consumer Durables and Risky Borrowing: the Effects of Bankruptcy Protection," Boston College Working Papers in Economics 573, Boston College Department of Economics, revised 01 May 2005.
  12. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
  13. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December.
  14. Lambrecht, Bart M & Perraudin, William R M & Satchell, Steven, 2003. " Mortgage Default and Possession under Recourse: A Competing Hazards Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 425-42, June.
  15. Anthony Pennington-Cross, 2004. "The value of foreclosed property," Working Papers 2004-022, Federal Reserve Bank of St. Louis.
  16. Ellen McGrattan & Richard Rogerson & Randall Wright, 1995. "An equilibrium model of the business cycle with household production and fiscal policy," Staff Report 191, Federal Reserve Bank of Minneapolis.
  17. Monika Piazzesi & Martin Schneider & Selale Tuzel, 2004. "Housing, Consumption and Asset Pricing," 2004 Meeting Papers 357c, Society for Economic Dynamics.
  18. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
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