Did bankruptcy reform lead to looser mortgage lending standards? Evidence from the U.S. mortgage market 2000-2007
Keywords:
Bankruptcy, means test, mortgage default, lending standardsAbstract
This paper seeks to find an exogenous cause for deterioration in mortgage lending standards since 2005 that contributed to the subprime mortgage crisis in the U.S. We find that the new
means test provision in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 was such an exogenous shock in the mortgage market. We show that the means test, which makes Chapter 7 bankruptcy unavailable to relatively better off borrowers, caused a shift in the supply of mortgage credit from better off borrowers to relatively poorer borrowers. Simultaneously, we found borrowers being charged higher interest rates, for all classes of income. Our findings imply that BAPCPA may be a contributing factor toward the deterioration of lending standards in the U.S. mortgage market.
Downloads
References
Baily, Martin Neil, Litan, Robert E., and Johnson, Matthew S. (2008). “The Origins of the Financial Crisis”, The Brookings Institution Initiative on Business and Public Policy.
Berkowitz, J. and R. Hynes (1999). “Bankruptcy exemptions and the market for mortgage loans.” Journal of Law and Economics, 42(2), 809–830.
Cagan, Christopher L. (2007). “Mortgage Payment Reset: The Rumor and the Reality.” First American CoreLogic.
Dell’Ariccia, Giovanni, Igan, Deniz and Laeven, Luc A. (2008). “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market”, IMF Working Paper No 08/106
Flynn, Ed, Bermant, Gordon and Hazard, Suzanne. (2002). “Bankruptcy by the Numbers: Chapter 7 Asset Cases”, US Trustee Program Library of Bankruptcy Articles http://www.usdoj.gov/ust/eo/public_affairs/articles/docs/abi122002.htm
Gerardi, Kristopher S., Shapiro, Adam Hale and Willen, Paul (2007). “Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures”, Federal Reserve Bank of Boston Working Paper No. 07-15.
Haughwout, Andrew, Peach, Richard and Tracy, Joseph (2008). “Juvenile delinquent mortgages: Bad credit or bad economy?” Journal of Urban Economics, 64, 246–257
Jacoby, Melissa B. (2007). “Bankruptcy Reform and Homeownership Risk”, University of Illinois Law Review, 2007; UNC Legal Studies Research Paper No. 918006
Keys, Benjamin J., Mukherjee, Tanmoy K., Seru, Amit and Vig, Vikrant. (2008), “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans”, EFA 2008 Athens Meetings Paper
Lin, Emily Y. and White, Michelle J. (2001). Bankruptcy and the Market for Mortgage and Home Improvement Loans. Journal of Urban Economics, 50, pp 138-162.
Livshits, I., MacGee, J. and Tertilt, M. (2003). “Consumer Bankruptcy: A Fresh Start” Federal Reserve Bank of Minneapolis Working Paper No. 617.
Mayer, Christopher J., Pence, Karen M. and Sherlund, Shane M. (2008). “The Rise in Mortgage Defaults,” Finance and Economics Discussion Series 2008-59, Board of Governors of the Federal Reserve System
Mian, Atif R. and Sufi, Amir (2008). “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis” Forthcoming, Quarterly Journal of Economics.
Morgan, Donald P., Iverson, Benjamin Charles and Botsch, Matthew (2008). “Seismic Effects of the Bankruptcy Reform”, Federal Reserve of New York Staff Report No. 358.
White, Michelle J. (2007). “Abuse or Protection: The Economics of Bankruptcy Reform under BAPCPA”, University of Illinois Law Review, vol. 2007:1, pp. 275-304.
White, Michelle J. (2008). “Bankruptcy: Past Puzzles, Recent Reforms and the Mortgage Crisis”, National Bureau of Economic Research Working Paper. 14549
Downloads
Published
How to Cite
Issue
Section
License
Ensayos de Política Económica