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1
Did Bankruptcy Reform Cause Mortgage Default to Rise?1
Wenli Li, Federal Reserve Bank of Philadelphia
Michelle J. White,
UC San Diego and NBER and
Ning Zhu, University of California, Davis
JEL categories: K35, G21, G01, R21
Original draft: September 2009 Current draft: March 2010
1 We are grateful to Mark Watson at the Kansas Fed for his invaluable support on the LPS mortgage data, to Susheela Patwari for very capable research assistance and to Nick Souleles, Gordon Dahl, Ronel Elul, Richard Green, Joseph Doherty, and Ed Morrison for extremely helpful comments. The views expressed here are the authors’ and do not represent those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
2
Abstract
This paper argues that the U.S. bankruptcy reform of 2005 played an important role in the mortgage crisis and the current recession. When debtors file for bankruptcy, credit
card debt and other types of unsecured debt are discharged—thus loosening debtors’
budget constraints. Homeowners in financial distress can therefore use bankruptcy to
avoid losing their homes, since filing allows them to shift funds from paying other debts
to paying their mortgages. But a major reform of U.S. bankruptcy law in 2005 raised the
cost of filing and reduced the amount of debt that is discharged in bankruptcy. We argue
that an unintended consequence of the reform was to cause mortgage default rates to rise.
We estimate a hazard model to test whether the 2005 bankruptcy reform caused
mortgage defaults to rise, using a large dataset of individual mortgages. Our major result
is that prime and subprime mortgage default rates rose by 29% and 27%, respectively,
after bankruptcy reform. We also use difference-in-difference to examine the effects of
three provisions of bankruptcy reform that particularly harmed homeowners who have
high incomes or high assets and we find that their default rates rose even more. Overall,
we calculate that bankruptcy reform caused around 360,000 additional mortgage defaults
per year, suggesting that the reform greatly increased the severity of the mortgage crisis
when it came.
3
Introduction
The financial crisis and the recession of 2008-09 were triggered by the bursting of the
housing bubble and the subprime mortgage crisis that began in late 2006/early 2007. But
we argue in this paper that U.S. personal bankruptcy law also played an important role.
Because credit card debt and other types of unsecured debt are discharged in bankruptcy,
filing for bankruptcy loosens homeowners’ budget constraints and allows them to shift
funds from paying other debts to paying their mortgages. Bankruptcy thus gives
financially distressed homeowners a way to avoid losing their homes when their debts
exceed their ability-to-pay. The availability of debt relief in bankruptcy was widely
known, the costs of filing were low, and there was little stigma attached to filing. Even
debtors with high income and high assets could take advantage of bankruptcy. But a
major reform of U.S. bankruptcy law in 2005 raised the cost of filing and reduced the
amount of debt discharged. It therefore caused bankruptcy filings to fall sharply. In this
paper we argue that an unintended consequence of bankruptcy reform was to increase the
number of mortgage defaults by closing off a popular procedure that previously helped
many financially distressed homeowners to pay their mortgages. The reform therefore
contributed to the severity of the mortgage crisis by pushing up default rates even before
the crisis began.
We use a large dataset of mortgages to test whether mortgage defaults rose as a result
of the 2005 bankruptcy reform. We find that mortgage default rates rose between 25 and
30% after bankruptcy reform and that default rates of homeowners with high incomes or
high assets—who were particularly negatively affected by bankruptcy reform—rose by
even more. We estimate that the 2005 bankruptcy reform caused several hundred
thousand additional mortgage defaults to occur each year, thus adding greatly to the
severity of the mortgage crisis when it came.
Bernstein (2008) and Morgan, Iverson and Botsch (2008) first suggested that the
2005 bankruptcy reform caused mortgage defaults to rise. Bernstein did not provide any
empirical tests. Morgan et al hypothesized that bankruptcy reform caused default rates to
increase by more in states with high homestead exemptions, because homeowners in
these states gained the most from filing for bankruptcy prior to the reform. They tested
this hypothesis by examining whether foreclosure rates rose by more in states with higher
4
exemptions. But the 2005 bankruptcy reform did not in fact change the treatment of
homestead exemption levels in bankruptcy, except by imposing a $125,000 cap on the
homestead exemption for a small fraction of homeowners. As a result, their test is not
very precise and they in fact did not find very strong support for their hypothesis.2 Also
because Morgan et al used aggregate state-year data covering a long time period, they
were unable to distinguish between the effects of bankruptcy reform versus the mortgage
crisis on default rates. In contrast, we examine the relationship between bankruptcy
reform and mortgage default using a large dataset of individual mortgages and a short
time period that ends before the start of the mortgage crisis. Our data also allow us to
examine how particular provisions of the 2005 bankruptcy reform affected default rates
of homeowners who were affected by these provisions.
Our paper also relates to the recent literature explaining mortgage default, including
Keys, Mukherjee, Seru and Vig (2007), Gerardi, Shapiro and Willen (2007), Mayer,
Pence, and Sherlund (2008), Demyanyk and van Hemert (2008), Rajan, Seru and Vig
(2009), Elul (2009), and Jiang, Nelson, and Vytlacil (2009). We add to this literature by
showing that bankruptcy law is another important factor explaining default.
The paper proceeds as follows. We start by discussing how U.S. bankruptcy law
treats mortgage debt and how the 2005 bankruptcy reform affected homeowners’
incentives to default on their mortgages. We then describe our dataset, our empirical
model, and the results. In last section, we estimate how many additional mortgage
defaults occurred starting in 2006 as a result of bankruptcy reform.
U.S. Bankruptcy Law and the 2005 Bankruptcy Reform3
US bankruptcy law provides two separate personal bankruptcy procedures—Chapter
7 and Chapter 13—and both help financially distressed homeowners keep their homes.
Prior to 2005, all debtors were allowed to choose between them. Under Chapter 7, most
2 They tested whether foreclosure rates rose by more after bankruptcy reform in states with higher or unlimited homestead exemptions, using separate dataset for prime and subprime mortgage foreclosures. They found a positive and significant relationship only for subprime mortgages in states with higher, but not unlimited, homestead exemptions. 3 See White (2007) and White and Zhu (2010) for further discussion of the 2005 bankruptcy reform and how it affected homeowners.
5
unsecured debts are discharged. Debtors are only obliged to use their assets above an
asset exemption level to repay unsecured debt; their future earnings are entirely exempt.
States set the asset exemption levels and have different exemptions for different types of
assets, but the homestead exemption for equity in an owner-occupied home is the largest
in nearly all states. In states with high homestead exemptions, even debtors with high
assets and high income may gain from filing for bankruptcy under Chapter 7. Under
Chapter 13, debtors must have regular earnings and must follow a court-supervised plan
to repay some of their debt from future earnings over a 3 to 5-year period. They are also
obliged to use their non-exempt assets—if any—to repay.
How does filing for bankruptcy help homeowners in financial distress? Consider
Chapter 7 first. Homeowners who wish to save their homes gain from filing under
Chapter 7, because discharge of unsecured debt increases their ability to pay their
mortgages. 4 In addition, filing under Chapter 7 stops mortgage lenders from foreclosing
for a few months, which gives homeowners who have fallen behind on their mortgage
payments additional time to pay. But the terms of residential mortgage contracts cannot
be changed in Chapter 7. Thus filing under Chapter 7 helps homeowners save their
homes, but only if they can pay all they owe on their mortgages within a few months.
Homeowners also gain from filing under Chapter 7 if they do not plan to save their
homes, because the delay in foreclosure proceedings during bankruptcy means they get
cost-free housing for several months. 5 Filing also benefits homeowners who have
positive home equity, since delay gives them more time to sell their homes privately and
obtain the highest price. If foreclosure has already occurred, then mortgage lenders in
some states have a claim against former homeowners for the difference between the
amount due on the mortgage and the sale price of the home—called a “deficiency
judgment.” These judgments are discharged in Chapter 7.
Homeowners’ gain from filing under Chapter 7 can be expressed as:
777 ]0,max[7 CXAHUrGainChapte A −−−+=
4 Berkowitz and Hynes (1999) first suggested that filing for bankruptcy helps homeowners keep their homes by reducing their unsecured debt. 5 In some states, homeowners can even stay in their homes through foreclosure, which means that they become tenants and the lender (now the landlord) must go through an eviction procedure to force them to leave (Elias, 2008).
6
7U is the value of unsecured debt discharged in Chapter 7. Homeowners receive this gain
in bankruptcy regardless of whether they keep their homes or not. 7H is the reduction in
the present value of future housing costs when homeowners file under Chapter 7. If
homeowners save their homes in Chapter 7, then 7H is small or zero. But if they give up
their homes, then 7H equals the reduction in the present value of future housing costs
when they shift from owning to renting. This includes homeowners’ gain from having
cost-free housing during bankruptcy and from having deficiency judgments discharged,
plus their gain from reducing their housing costs by renting rather than owning.
]0,max[ AXA− equals the value of homeowners’ non-exempt assets, where A denotes
the value of homeowners’ assets and AX is the state’s homestead exemption.6
Homeowners who have non-exempt assets must use them to repay unsecured debt in
bankruptcy and, as a result, they rarely file for bankruptcy since their homes will be sold
as part of the bankruptcy procedure. Finally, 7C is homeowners’ cost of filing for
bankruptcy under Chapter 7, including both time costs and out-of-pocket costs.
Homeowners in financial distress who wish to save their homes often benefit more
by filing for bankruptcy under Chapter 13. While the terms of first mortgages cannot be
changed in bankruptcy, homeowners in Chapter 13 are allowed to spread repayment of
their mortgage arrears, plus interest, over the period of their repayment plans. They must
also make all of their normal mortgage payments during the plan, but lenders cannot
proceed with foreclosure as long as homeowners are making the required payments. If
homeowners complete all of the payments specified in the plan, then the original
mortgage contract is reinstated. Thus Chapter 13 allows homeowners to save their
homes even if they have large mortgage arrears, by giving them several years to repay.
Prior to 2005, homeowners proposed their own Chapter 13 plans and were allowed to
choose the length of the repayment period and the amount of unsecured debt to be repaid.
They frequently proposed plans that repaid their mortgage arrears in full, but paid only a
6 Financial assets other than home equity are not generally exempt in bankruptcy. But homeowners who plan in advance can convert financial assets into home equity by paying down their mortgages. They are allowed to keep the additional home equity in bankruptcy as long as their total home equity is less than the homestead exemption.
7
token amount to unsecured creditors. Bankruptcy judges generally accepted these plans
as long as homeowners would not be required to repay any of their unsecured debt if they
filed under Chapter 7. 7 Also in Chapter 13, second mortgages are sometimes discharged
if they are completely underwater and bankruptcy trustees sometimes challenge fees and
penalties that mortgage lenders add to the mortgage payments. 8
Homeowners also gain from filing under Chapter 13 if they do not plan to save their
homes, or if they decide after filing that they cannot afford to save their homes. The
same amount of unsecured debt is discharged in Chapter 13 as in Chapter 7 and car loans
can also be partially discharged in Chapter 13. Also homeowners can delay foreclosure
and live cost-free in their homes for longer in Chapter 13 than in Chapter 7, particularly if
they propose and then withdraw several repayment plans.
Homeowners’ gain from filing under Chapter 13 can be expressed as:
.]0,max[13 1313131313 CXAIHCUrGainChapte A −−−−++=
Here 13U refers to unsecured debt discharged in Chapter 13, where 13U = 7U for most
filers. 13C is the value of car debt that can be discharged only in Chapter 13. 13H is the
reduction in the present value of the future cost of housing when homeowners file under
Chapter 13. If homeowners keep their homes in Chapter 13, then 13H equals the
reduction in the present value of the cost of owning due to discharge of second
mortgages, home equity loans, fees and/or penalties. If homeowners move to rental
housing, then 13H equals the difference between the cost of renting versus owning,
including homeowners’ gain from having cost-free housing during the bankruptcy
process. 13I denotes the present value of future income that must be used to repay
unsecured debt in Chapter 13; prior to 2005 this was generally only a token amount.
7 Debtors are obliged to repay unsecured debt from home equity in Chapter 13 because the “best interests of creditors” test, § 1129(a)(7) of the U.S. Bankruptcy Code, requires that unsecured creditors receive no less in Chapter 13 than they would receive in Chapter 7. These payments are made over five years as part of the debtor’s repayment plan. 8 Having a second mortgage discharged in Chapter 13 requires that a valuation hearing be held, which raises bankruptcy costs. For more detailed discussion of how Chapter 13 affects homeowners, see Elias (2006), Eggum, Porter and Twomey (2008), Carroll and Li (2008). Porter (2008) discusses how mortgage lenders often add excessive fees to mortgages in default.
8
]0,max[ AXA− is again the value of non-exempt assets that homeowners must use to
repay unsecured debt. Finally, 13C is homeowners’ cost of filing for bankruptcy under
Chapter 13, where 13C exceeds 7C .
Thus prior to 2005, the availability of bankruptcy both reduced default rates by
increasing homeowners’ ability to pay their mortgages and increased default rates by
reducing the cost to homeowners of giving up their homes. Overall, bankruptcy had
mixed effects on homeowners’ default incentives.
Now consider how the 2005 bankruptcy reform changed homeowners’ gains from
filing for bankruptcy and defaulting on their mortgages. The reform made several
important changes in bankruptcy law. First, it raised homeowners’ costs of filing.
According to a study by the Government Accountability Office (2008), debtors’ median
filing costs rose from $700 to $1,100 under Chapter 7 and from $2,000 to $3,000 under
Chapter 13. In addition, debtors in Chapter 13 must pay a fee to the Chapter 13 trustee
which may be as high as 10% of the amount specified in their repayment plans. Debtors’
costs of filing also rose because of new requirements that they undergo credit counseling
before filing, take a course in debt management during the bankruptcy process, and
provide extensive documentation of their income and assets—including copies of past tax
returns. Higher filing costs are predicted to reduce homeowners’ probability of filing for
bankruptcy and to raise default rates for homeowners who would previously have used
bankruptcy to save their homes.
Second, the reform introduced a new “means test” that forces some high-income
homeowners to file under Chapter 13 and to repay some of their unsecured debt from
future income. Suppose homeowners have no non-exempt assets. They first compute
their average family income during the six months before filing and convert it to a yearly
income figure, denoted I. Then they compare their income to the median family income
level in the state, adjusted for family size. State median income levels vary widely, from
$46,000 for a family of three in Mississippi to $85,000 for a family of the same size in
New Jersey and Connecticut. If family income I is less than the state median income
level, then the homeowner is allowed to file under Chapter 7. But if homeowners’
income exceeds the state median level, then they must compute individualized income
exemptions. They start with pre-determined allowances for housing costs, transport
9
costs, and personal expenses. Then they add their mortgage and car loan payments in
excess of the pre-determined housing and transport allowances. Finally they add a list of
other allowed expenses. 9 Their yearly income exemption under the means test, denoted
IX , equals the total. Homeowners’ non-exempt income equals income minus the
income exemption, or IXI − . If IXI − exceeds $2,000 per year, then homeowners
must file under Chapter 13 if they file for bankruptcy at all and they must use all of their
non-exempt income for five years, or )(5 IXI − , to repay debt. Since homeowners’
obligation to repay debt from future income was a token amount prior to bankruptcy
reform, those with high incomes now benefit less from filing for bankruptcy. These
homeowners are predicted to default on their mortgages more often. We refer to this test
as the “income-only means test.”
Third, the reform also harmed some homeowners who have both non-exempt income
and non-exempt assets. Prior to the reform, these homeowners were obliged to use their
non-exempt assets, AXA − , to repay unsecured debt in bankruptcy and they were also
obliged to use a token amount of future income to repay if they filed under Chapter 13.
After the reform, their obligation to repay equals the maximum of their non-exempt
assets, AXA− , or their non-exempt income over 5 years, )(5 IXI − . Thus homeowners
who have non-exempt income in excess of their non-exempt assets, or
AI XAXI −>− )(5 , gain less from filing after bankruptcy reform. We refer to this test
as the “income/asset means test.”
Finally, the reform imposed a new cap on the homestead exemption which limits the
asset exemption AX to a maximum of $125,000. In order to be affected by the cap,
homeowners must have home equity exceeding $125,000, must live in one of the ten
states that have homestead exemptions greater than $125,000, and must have owned their
9 The pre-determined amounts for housing, transport costs and personal expenses are taken from Internal Revenue Service procedures for collecting from delinquent taxpayers. They vary by location and, for personal expenses, by family size and income. See www.justice.gov/ust/eo/bapcpa/20090315/meanstesting.htm. Other allowed expenses include the costs of caring for elderly or disabled relatives, some children’s education expenses, tax payments, mandatory payroll deductions, costs of home security, and telecommunication costs.
10
homes for less than 3½ years. 10 Few homeowners are subject to the cap, but those
affected found filing for bankruptcy much less attractive after the reform, since they are
now forced to give up their homes in bankruptcy and repay much more of their unsecured
debt. The new cap is therefore predicted to increase mortgage default.
Our predictions are therefore as follows: (1) The mortgage default rate is predicted
to rise for all homeowners following the 2005 bankruptcy reform, because filing for
bankruptcy became more costly. (2) The default rate of homeowners who fail the new
means test is predicted to rise after bankruptcy reform, since after the reform they must
use some of their future income to repay unsecured debt in bankruptcy and they therefore
gain less from filing. (3) The default rate of homeowners who both fail the new means
test and have non-exempt income exceeding their non-exempt assets is also predicted to
rise, because they must repay more after bankruptcy reform. (4) The default rate of
homeowners who are subject to the cap on the homestead exemption is predicted to rise
after bankruptcy reform, since the cap forces them to give up their homes in bankruptcy.
Table 1 shows the three groups of homeowners who were particularly negatively
affected by bankruptcy reform as a function of whether they have non-exempt assets
and/or non-exempt income. In the next section, we test the predictions that homeowners
in general are more likely to default on their mortgages after bankruptcy reform and that
homeowners in the three negatively-affected groups are even more likely to default after
bankruptcy reform.11
Data and summary statistics
We use data for individual mortgages from LPS Applied Analytics, Inc., which
includes detailed information from the time of mortgage origination, plus updates each
month on whether homeowners paid their mortgages in full and whether they filed for
bankruptcy. Both prime and subprime mortgages are covered. Our sample consists of
10 States that have unlimited homestead exemptions are Arkansas, Florida, Iowa, Kansas, Oklahoma, Texas, and the District of Columbia. In addition, Arizona had a homestead exemption of $150,000 in 2005; Massachusetts $500,000; Minnesota $200,000; and Nevada $200,000, raised to $350,000 in 2006. See Elias (2007) and earlier editions. 11 We neglect other changes made under the 2005 bankruptcy reform, since their effects cannot be tested with our data. See Morgan et al (2008) for discussion of how bankruptcy reform affected car loans.
11
first-lien, 30 year mortgages used for home purchase or refinance. All mortgages
originated between January 2004 and December 2005 and were in effect during at least
part of our sample period. We follow them until they are repaid in full, go into default, or
until the sample period ends.
Following the literature, we construct separate samples of prime and subprime
mortgages.12 Our prime and subprime samples contain approximately 380,000 and
269,000 separate mortgages, respectively.13 Because the LPS data do not include any
demographic characteristics for homeowners, we merge the LPS data with data from the
Home Mortgage Disclosure Act (HMDA) to get homeowners’ income, sex, race, and
marital status at the time of mortgage origination.14 We also add other local-level
macroeconomic data and state-level bankruptcy information. 15
Because bankruptcy reform went into effect in the middle of October 2005, we delete
October 2005 observations from our dataset. Our sample period is three months before
bankruptcy reform to three months after. We intentionally use a short sample period so
12 We use lenders’ classifications concerning whether individual mortgages are prime versus subprime. The prime mortgage category includes alt-A mortgages, which are considered to be intermediate between prime and subprime. Alt-A borrowers generally do not provide full documentation of income and assets. 13 We start with a 10% random sample of LPS prime mortgages that originated in 2004 or 2005 and were still in effect in July 2005. With the loss of observations resulting from the HMDA match (see below), our final sample is approximately 5% of the LPS dataset. Because LPS under-represents subprime mortgages, we start with all subprime mortgages in the dataset, but end up with a final sample of approximately 50%. 14 HMDA data cover nearly all mortgage originations. Mortgages were matched based on the zipcode of the property, the date when the mortgage originated (within 5 days), the origination amount (within $500), the purpose of the loan (purchase, refinance or other), the type of loan (conventional, VA guaranteed, FHA guaranteed or other), occupancy type (owner-occupied or non-owner-occupied), and lien status (first-lien or other). The match rate was 48%. We calculated summary statistics for all the variables that are included in this study and found no significant differences between the means of the matched observations and the original LPS dataset. This suggests that the matched observations are a random subset of the original LPS dataset. See www.ffiec.gov/hmda/history.htm for information on HMDA data. 15 Additional variables include unemployment rates by metropolitan area taken from the Bureau of Labor Statistics; income data by state taken from the Bureau of Economic Analysis; housing price data by metropolitan area taken from the Federal Housing Finance Agency; bankruptcy exemption levels by state taken from Elias (2006 and earlier editions); and median state income levels taken from the U.S. Trustee Program at the Department of Justice. See below for discussion of how we use these variables.
12
that other aspects of the economic environment remain fairly constant and so that the
sample period ends before the mortgage crisis began. Our sample sizes are
approximately 2.2 million and 1.5 million monthly observations for the prime and
subprime mortgage samples, respectively. We also rerun the model on a longer sample
period from six months before to six months after bankruptcy reform.
We define mortgage default to occur when payments become 60 days delinquent.
Figure 1 gives mortgage default rates for the prime and subprime mortgage samples
during the period six months before to six months versus after bankruptcy reform. Both
default rates jumped when bankruptcy reform went into effect, with a particularly large
increase for prime mortgages.
Now turn to how we calculate dummy variables to represent the three groups of
homeowners who are particularly negatively affected by bankruptcy reform. To do so,
we need to calculate homeowners’ non-exempt income and non-exempt home equity.
We have data on family income at the time of mortgage origination, but we do not have
all the information needed to calculate individual income exemptions according to the
procedure specified by bankruptcy law. Instead, we use the state median income level as
a proxy for the income exemption IX ; thus homeowners’ non-exempt income equals
family income minus the state median income level, or else zero, or ]0,max[ IXI − .16 To
calculate non-exempt home equity, we first calculate the current value of the home by
updating home value at the time of mortgage origination using the average monthly
change in housing values in the homeowner’s metropolitan area since the date of
origination. 17 We also know the mortgage principle each month, so that home equity
equals the current value of the house minus the current mortgage principle. Non-exempt
home equity then equals the current value of home equity minus the homestead
16 The state median income level is a natural proxy for the income exemption, since it is used to determine whether homeowners must go through the procedure of calculating individual income exemptions, including revealing all of the relevant information. 17 If the homeowner lives in a non-metropolitan area, we update the value of the house using the average change in housing values in the non-metropolitan areas of the state.
Note that our estimates of home equity are biased upward, since we ignore second
mortgages—for which we have no data.
13
exemption. We assume that homeowners have no assets other than their home equity, so
that non-exempt home equity equals ]0,max[ AXA − .
Define 1MT to denote homeowners who are harmed by the income-only means test.
MT1 equals one if homeowners have non-exempt income, but no non-exempt home
equity, or if >− IXI 0 and 0≤− AXA . Also define 2MT to denote homeowners who
are harmed by the income/asset means test. MT2 equals one if homeowners have both
non-exempt income and non-exempt home equity and if the former exceeds the latter, or
if >− IXI 0>− AXA . In addition, define HC to denote homeowners who are harmed
by the homestead exemption cap. HC equals one if homeowners have non-exempt home
equity exceeding $125,000, or if 000,125>− AXA , and if their mortgages were for
purchase rather than refinance. (We assume that homeowners whose mortgages were for
refinance are not subject to the cap because they have owned their homes for more than
3½ years.) Finally, BR denotes months when the 2005 bankruptcy reform was in effect.
Specification
We estimate a Cox proportional hazard model of mortgage default, where the
baseline hazard depends on the age of the mortgage in months (see Kiefer, 1988). We
use a proportional hazard model because we are explaining time to default and because
the hazard model takes account of both left- and right-censoring. Both types of censoring
are important for our purposes, since we use a short sample period and therefore nearly
all of our mortgages originate before the sample period starts and/or continue after the
sample period ends. The hazard of default rises with mortgage age in our data, peaking at
15 months and 10 months for prime and subprime mortgages, respectively, and then
declining.18
The key variables affecting mortgage default are the dummy variable BR for months
when bankruptcy reform was in effect, the three separate dummy variables MT1, MT2
and HC for groups of homeowners that were particularly harmed by bankruptcy reform,
and interactions of BR with MT1, MT2 and HC. The key results are the coefficient of the
bankruptcy reform dummy, which measures the overall increase in default rates after
18 Jiang et al (2009) and Demyanyk and van Hemert (2008) find a similar pattern of rising default rates as mortgage age increases, using different datasets.
14
bankruptcy reform went into effect, and the three difference-in-difference terms, which
measure whether default rates rise by more after bankruptcy reform for homeowners in
each of the three groups that were particularly harmed by bankruptcy reform.
Ai and Norton (2003) pointed out that, while difference-in-differences in linear
models equal the coefficients of interaction terms, this result does not carry over to non-
linear models. Instead difference-in-differences in non-linear models must be calculated
by evaluating the full estimated model, including all of the results for the control
variables. We compute corrected difference-in-differences for the hazard model using
this procedure.19
Our choice of control variables is guided by the recent literature on mortgage default
(see references above). Our demographic variables are whether the homeowner is
married, is African-American, or is female. We include dummy variables representing
ranges of FICO scores (the highest category is omitted), ranges of loan-to-value ratios
and ranges of debt-to-income ratios (the lowest categories are omitted). 20 We also
include dummy variables for whether the loan is a jumbo, whether it is fixed-rate (versus
adjustable rate or hybrid), whether it is for refinance (versus purchase), whether
homeowners provided full documentation of income and assets when applying for the
mortgage, provided partial documentation, or whether documentation information is
missing (the omitted category is no documentation), whether the property is single-
family, and whether it is a vacation home or an investment property (the omitted category
is primary residences). Additional dummy variables include whether the mortgage was
securitized and whether it was originated by the lender that services it, acquired
wholesale, or acquired from a correspondent (the omitted category is mortgages
19 The difference-in-difference for the homestead exemption cap equals
)1,0(ˆ/)]1,0(ˆ)1,1(ˆ[ ====−== BRHCDBRHCDBRHCD -
)0,0(ˆ/)]0,0(ˆ)0,1(ˆ[ ====−== BRHCDBRHCDBRHCD , where )1,1(ˆ == BRHCD
denotes the predicted probability of default when HC = 1, BR = 1, and the other variables in the model are evaluated using their estimated coefficients. Other difference-in-difference terms are calculated using the same procedure. We also compute corrected values for the coefficients of BR, MT1, MT2 and HC. The only papers we have found that use a hazard model to estimate interaction terms and compute difference-in-differences correctly are Chen (2008), which uses a much smaller dataset, and Elul et al (2010). We use Stata 11 for these calculations. 20 Debt-to-income ratios include second mortgages and non-mortgage debt.
15
originated by independent mortgage brokers).21 We also include a variable measuring
homeowners’ benefit from refinancing their mortgages at the currently-available interest
rate—this variable takes higher values when interest rates on new mortgages are lower.22
We also include the lagged unemployment rate in the metropolitan area, the lagged real
income growth rate in the state, and the lagged average mortgage default rate in the
homeowner’s zipcode. (All lags are one month.) Finally we include state and month
fixed effects. We cluster observations by mortgage.
Table 2 gives summary statistics for both samples. 23 The default rate of 1.3% per
month for subprime mortgages is far higher than the default rate of 0.2% per month for
prime mortgages. Another striking difference is that 44% of subprime mortgage-holders
are harmed by the income-only means test, compared to only 27% of prime mortgage-
holders. This suggests that subprime mortgage-holders were much more likely to
overstate their incomes on their loan applications. Subprime mortgage-holders also
have far lower FICO scores and higher debt-to-income ratios and loan-to-value ratios
than prime mortgage-holders.
Results
Table 3 gives the results for the base case hazard model, using the sample period
three months before to three months after bankruptcy reform. Only the results for the
control variables are listed (results for the other variables are given in table 5). The
results are in the form of proportional increases/decreases in default rates when the
explanatory variable increases by one unit, depending on whether the figures given are
21 Correspondents are mortgage brokers that originate mortgages only for a single lender; while independent mortgage brokers sell to multiple lenders. Correspondents’ interests are more closely aligned with the interests of banks than those of independent mortgage brokers. See Jiang et al (2009) for discussion of the role of mortgage brokers and Keys et al (2008) for discussion of the role of securitization in explaining default. 22 This variable equals {r0[1-(1+rt)
t-M]}/{ rt[1-(1+r0)t-M]}, where r0 is the interest rate on
the homeowner’s existing mortgage, rt is the interest rate currently available on new mortgages, and M is time to maturity. See Richard and Roll (1989). 23 Most of the control variables are observed only at the time of mortgage origination; table 3 shows which variables are updated each month. We do not include the monthly rate of increase of house prices in the metropolitan area as a control, since this information is used in constructing the dummy variables for the income/asset means test and the homestead exemption cap.
16
greater than/less than one. Tests of statistical significance are for whether the results
differ significantly from one. Results for the controls are generally similar to those in
the literature: homeowners are more likely to default when they have lower FICO scores,
higher debt-to-income ratios and higher loan-to-value ratios. All of the results for
variables representing mortgage sources are less than one, implying that mortgages
originated by independent mortgage brokers—the omitted category—are the most likely
to default.24 Prime mortgages that were securitized are more likely to default, but—
surprisingly— subprime mortgages that were securitized are less likely to default.25
Another surprising result is that the documentation variables are generally insignificant,
suggesting that higher levels of documentation are not associated with reduced likelihood
of default.26 We also find that homeowners are more likely to default if they live in
zipcodes with higher lagged average mortgage default rates, in metropolitan areas with
higher lagged unemployment rates, and in states with lower lagged real income growth
rates.
Table 4 gives the results for the key variables. Because the interaction terms are
correlated with each other and with the bankruptcy reform dummy, we show the results
when they enter both individually and together. In both samples, the adoption of
bankruptcy reform led to a substantial increase in mortgage default rates—29% for prime
mortgages and 27% for subprime mortgages—and both are strongly statistically
significant (p < .001). The results for MT1, MT2 and HC are either below one or greater
than one but insignificant. Since these variables are correlated with higher income or
assets, they are associated with lower default rates.
24 This is similar to the results of Jiang et al (2009), who use different data. 25 See Keys et al (2008) and Rajan et al (2009) for discussion of the relationship between securitization and default. Both papers argue that securitization led to a decline over time in the quality of “soft” information collected about borrowers whose mortgages were likely to be securitized and this in turn led to higher default rates for securitized mortgages. 26 This contrasts with the results of Jiang et al (2009) and Sherlund (2008), who both found that low-doc and no-doc mortgages were more likely to default. However Jiang et al find that borrowers are more likely to choose low-doc loans when they have high income and/or credit scores, which may explain the lack of strong positive relationship between low- or no-doc loans and default.
17
Now turn to the difference-in-differences. Prime mortgage-holders’ default rates
increased by more after bankruptcy reform if they were harmed by either of the two
means tests: using the results in column (5), default rates rose by 33% more if prime
mortgage-holders were harmed by the income-only means test and by 20% if they were
harmed by the income/asset means test. Both results are significant at the 1% level or
higher. Prime mortgage-holders’ default rates also increased by 15% more if they were
harmed by the homestead exemption cap, but the result is not statistically significant. For
subprime mortgage-holders, the difference-in-differences for the two means tests are also
positive as expected, but smaller in magnitude, and only the result for the income-only
means test approaches statistical significance—it is 6% (p = .061). But the difference-in-
difference for the homestead exemption cap is large and statistically significant at 38% (p
= .02). The results for the means tests suggest that many subprime mortgage-holders
exaggerated their income levels in applying for loans and therefore were harmed less by
the adoption of the means test than prime mortgage-holders. The results for the
homestead exemption cap suggest that even when subprime mortgage-holders have high
home equity, they are more prone to financial distress than prime mortgage-holders,
presumably because subprime mortgage-holders have fewer financial resources other
than their home equity.
In order to determine whether the effect of bankruptcy reform on default was
temporary, we ran the same model using a sample period of six months before to six
months after bankruptcy reform. (We again dropped October 2005). This period, while
longer, still ends before the mortgage crisis began. The results, shown in table 4, are
similar to those in table 3. The overall increase in default rates after bankruptcy reform is
26% for homeowners with prime mortgages and 32% for homeowners with subprime
mortgages (using the results in column (5)), and both are strongly statistically significant
(p < .01). The results for prime mortgage-holders again show much bigger increases in
default rates after bankruptcy reform for those who are harmed by either of the two
means tests: the difference-in-differences are now 19% for the income-only means test
and 24% for the income/asset means tests (p < .001 for both). For subprime mortgage-
holders, the results are similar to those in the shorter sample period, with the difference-
in-difference terms for the two means tests positive but smaller than in the prime
18
mortgage sample—they are now 7% (p = .005) for the income-only means test and 8% (p
= .092) for the income/asset means test, while the difference-in-difference for the
homestead exemption cap is 25% and significant at the 5% level. Thus the results are
similar over the longer sample period.
As robustness checks, we ran placebo tests assuming bankruptcy reform went into
effect in June 2005 or February 2006, rather than the actual date of October 2005. We
again used a sample period of 3 months before to three months after the “date” of
bankruptcy reform. The results, shown in table 5 for the combined regression show that,
with one exception, the difference-in-differences all either become negative (less than
one) or remain positive but are insignificant. However the results for BR show that the
number of mortgage defaults increases significantly in June 2005 and falls significantly
in February 2006; this is because the number of mortgage defaults is trending upward
before the true date of bankruptcy reform and trending downward after the true date of
bankruptcy reform and BR captures these trends when set to a fake date (as in figure 1).
We also reran the models in tables 4 and 5, but clustered the errors by zipcode rather than
by mortgage. The results (not shown) remained virtually unchanged.
Overall, the results support our hypotheses that bankruptcy reform led to a general
increase in mortgage default rates because filing for bankruptcy became more costly and
to an even larger increase in mortgage default rates for homeowners who were harmed by
the adoption of the two means tests and the homestead exemption cap. Our results also
suggest that bankruptcy reform caused mortgage default rates to rise more than just
temporarily.
Conclusion
Our main result is that the 2005 bankruptcy reform caused mortgage default rates
to rise. Using the results for the three-month period before versus after bankruptcy
reform, we find that the default rate of homeowners with prime and subprime mortgages
rose by 29% and 27%, respectively. Default rates of homeowners who fail the new
means test or are subject to the new cap on the homestead exemption rose by even more,
compared to the increase for homeowners not subject to these provisions. The
difference-in-differences for the two means tests are larger for prime mortgage-holders,
19
suggesting that subprime mortgage-holders were more likely to exaggerate their incomes;
while the difference-in-difference for the cap on the homestead exemption is larger for
subprime mortgage-holders. These results suggest that bankruptcy reform squeezed
homeowners’ budget constraints by making bankruptcy filings more expensive and by
reducing the amount of debt discharge in bankruptcy. The reform therefore increased
mortgage default by closing off a popular procedure that previously helped financially
distressed homeowners to save their homes. Our results suggest that bankruptcy reform
contributed to the severity of the mortgage crisis by causing mortgage default to rise even
before the mortgage crisis began.
We can use these results to predict the number of additional mortgage defaults that
occurred as a result of the 2005 bankruptcy reform. Consider first the general effect of
the increase in the cost of filing for bankruptcy. There were 22 million mortgage
originations during the period 2004-05, of which approximately 81% were prime and
19% were subprime (Mayer and Pence, 2008). Default rates in our sample are .025 and
.145 per year and the adoption of bankruptcy reform caused default rates to rise by .29
and .27 for prime and subprime mortgages, respectively. Using the mortgages originated
in these years as a base, we calculate that the adoption of bankruptcy reform caused the
number of mortgage defaults per year to increase by 288,000. (See table 6.) In addition,
the adoption of the means test and the homestead exemption cap are also predicted to
increase default. Using the same approach, the income-only means test is predicted to
cause 50,000 additional defaults per year by homeowners who fail the test, the
income/asset means test is predicted to cause 16,000 additional defaults per year by
homeowners with prime mortgages who fail the test, and the cap on the homestead
exemption is predicted to cause 3,000 additional defaults per year by subprime mortgage-
holders who are subject to the cap. The total increase in yearly mortgage defaults due to
the three provisions is therefore 66,000. Thus even before the mortgage crisis began, the
2005 bankruptcy reform was responsible for around 360,000 additional mortgage defaults
per year by homeowners who obtained their mortgages in 2004-05. This figure would be
even higher if the model were applied to other mortgage cohorts.
The Bush and Obama Administration have both tried a number of programs to deal
with the housing crisis by encouraging mortgage lenders to renegotiate mortgages rather
20
than foreclose when homeowners default. None of these programs have been very
successful. Our results suggest that a simple change such as rolling back the cost of
filing for bankruptcy to pre-2005 levels would help in dealing with the housing crisis by
substantially reducing the number of mortgage defaults.
27
27 The figure for the number of additional defaults by homeowners who fail the income-only means test is 22,000,000(.81*.266*.0018*.33*11.86 + .19*.435*.0117*.055 *11.12) = 46,000, where .266 and .435 are the proportions of prime and subprime mortgage-holders who fail the test, .0018 and .0117 are the monthly default rates of prime and subprime mortgages who fail the test, and .33 and .055 are the proportional increases in the default rates of prime and subprime mortgage-holders who fail the test, respectively. The number of additional defaults by homeowners with prime mortgages who fail the income/asset means test is 22,000,000*(.81*.314*.0012*.196*11.86) = 16,000, where .314 is the proportion of prime mortgage-holders who fail the test, .0012 is the default rate of prime mortgage-holders who fail the test, and .196 is the proportional increase in the default rate after bankruptcy reform of prime mortgage-holders who fail the test. The number of additional defaults by subprime mortgage-holders who are subject to the homestead exemption cap after bankruptcy reform is 22,000,000*(.19*.014*.0137* .378*11.12) = 3,000, where .014 is the proportion of subprime mortgage-holders who are subject to the cap, .0137 is the default rate of subprime mortgage-holders subject to the cap, and .378 is the proportional increase in the default rate after bankruptcy reform of subprime mortgage-holders subject to the cap. We do not calculate increases in the number of defaults for subprime mortgage-holders who fail the income/asset means test or for prime mortgage-holders who are subject to the cap on the homestead exemption, since these changes are not statistically significant in the 3-month sample. See the previous footnote for data sources.
21
Figure 1:
Average Mortgage Default Rates
Six Months Before and Six Months After Bankruptcy Reform
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
Prime mortgages
0
0.005
0.01
0.015
0.02
Subprime mortgages
22
Table 1:
Effect of the 2005 Bankruptcy Reform on
Homeowners’ Obligation to Repay in Bankruptcy
All home equity exempt Some home equity non-exempt
All income
exempt
No change Must repay more if homestead exemption cap is
binding (HC = 1);
otherwise no change
Some income
non-exempt
Must repay more (MT1 = 1)
Must repay more if non-exempt income > non-exempt home equity
(MT2 = 1); otherwise no change
Note: prior to the 2005 bankruptcy reform, all income was exempt.
23
Table 2: Summary Statistics
Three Months Before to Three Months After Bankruptcy Reform
Prime Mortgages Subprime Mortgages
Default rate per month 0.0020 (.045) 0.0132 (.114)
Homestead exemption cap (HC) 0.0472 (.212) 0.0136 (.116)
Income-based means test (MT1) 0.266 (.442) 0.435 (.496)
Income/asset means test (MT2) 0.314 (.464) 0.121 (.326)
Average income* $102,000 (91,000) $72,800 (59,000) If FICO score 650 to 750* 0.521 (.500) 0.231 (.421) If FICO score 550 to 650* 0.138 (.345) 0.625 (.484) If FICO score 350 to 550* 0.0073 (.085) 0.124 (.330)
Debt payment-to-income ratio > 0.5* 0.083 (.276) 0.044 (.205)
Debt payment-to-income ratio (0.4, 0.5)* 0.119 (.324) 0.191 (.394)
Debt payment-to-income ratio missing* 0.344 (.475) 0.526 (.499)
Loan-to-value ratio > 1.0* 0.017 (.131) 0.00025 (.016)
Loan-to-value ratio (0.8,1.0)* 0.219 (.413) 0.385 (.486)
If full documentation* 0.368 (.482) 0.563 (.496)
If partial documentation* 0.077 (.266) 0.023 (.149)
If documentation information missing* 0.159 (.365) 0.107 (.309)
If single-family house* 0.747 (.434) 0.808 (.393)
If fixed rate mortgage* 0.609 (.488) 0.246 (.431)
If jumbo loan* 0.147 (.354) 0.087 (.281)
If vacation home* 0.040 (.196) 0.010 (.101)
If investment property* 0.051 (.220) 0.050 (.218)
If occupancy type missing* 0.194 (.395) 0.050 (.219)
If loan was to re-finance* 0.351 (.477) 0.523 (.499)
If mortgage was securitized 0.242 (.429) 0.822 (.382)
If loan was originated by the lender 0.515 (.500) 0.434 (.495)
If loan was acquired wholesale, but not from a mortgage broker 0.194 (.396) 0.172 (.377)
If loan was acquired from a correspondent lender 0.221 (.415) 0.102 (.303)
Homeowner’s gain from refinancing 1.07 (.239) 0.839 (.145)
Lagged cumulative delinquency rate (zipcode) 0.091 (.321) 0.341 (.726)
Lagged unemployment rate (MSA) 0.046 (.013) 0.047 (.013)
Lagged real income growth rate (state) 0.0019 (.024) 0.0020 (.033)
Notes: The sample period is from July 2005 through January 2006, excluding October 2005. Variables marked with asterisks are observed only at origination. Summary statistics for these variables are computed based on values at the time of origination; while summary statistics for variables without asterisks are averages over all months of data. Debt-to-income ratios are available starting January 2005.
24
Table 3:
Results of Cox Proportional Hazard Models Explaining Mortgage Default
Three Months Before to Three Months After Bankruptcy Reform
Prime Mortgages
(1) (2) (3) (4) (5)
Bankruptcy reform (BR)
1.29*** (.085)
1.28*** (.085)
1.29*** (.086)
1.28*** (.085)
1.29*** (.086)
Income-only means test (MT1)
0.94 (.036)
0.87*** (.036)
Income/asset means test (MT2)
0.81*** (.035)
0.77*** (.035)
Homestead exemption cap (HC)
1.06 (.108)
1.08 (.114)
Bankruptcy reform*income-only means test (BR*MT1)
1.31***
(.069) 1.33***
(.067)
Bankruptcy reform*income/asset means test (BR*MT2)
1.10 (.067)
1.20** (.066)
Bankruptcy reform*homestead exemption cap (BR*HC)
1.31 (.213)
1.15 (.229)
Subprime Mortgages
(1) (2) (3) (4) (5)
Bankruptcy reform (BR)
1.29*** (.042)
1.27*** (.041)
1.29*** (.042)
1.29*** (.042)
1.27*** (.042)
Income-only means test (MT1)
0.90*** (.016)
0.89*** (.016)
Income/asset means test (MT2)
1.00 (.030)
0.96 (.030)
Homestead exemption cap (HC)
0.89 (.079)
0.92 (.082)
Bankruptcy reform*income-only means test (BR*MT1)
1.06*
(.029) 1.06
(.029)
Bankruptcy reform* income/asset means test (BR*MT2)
0.99 (.056)
1.02 (.055)
Bankruptcy reform*homestead exemption cap (BR*HC)
1.39** (.158)
1.38* (.163)
25
Notes: ***, ** and * indicate whether the coefficient is significantly different from one at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in parentheses. All equations include the control variables shown in the Appendix, plus month and state dummies. The equation shown in column (1) is the same as that shown in table 4.
Table 4:
Results of Cox Proportional Hazard Models Explaining Mortgage Default
Six Months Before to Six Months After Bankruptcy Reform
Prime Mortgages (1) (2) (3) (4) (5)
Bankruptcy reform (BR)
1.25** (.097)
1.25** (.096)
1.27** (.098)
1.25** (.097)
1.26** (.097)
Income-only means test (MT1)
0.95* (.028)
0.88*** (.028)
Income/asset means test (MT2)
0.83*** (.028)
0.79*** (.028)
Homestead exemption cap (HC)
0.97 (.081)
0.99 (.084)
Bankruptcy reform*income-only means test (BR*MT1)
1.14**
(.053) 1.19***
(.052)
Bankruptcy reform* income/asset means test (BR*MT2)
1.19*** (.053)
1.24*** (.052)
Bankruptcy reform*homestead exemption cap (BR*HC)
1.18 (.162)
1.11 (.170)
Subprime Mortgages
(1) (2) (3) (4) (5)
Bankruptcy reform (BR)
1.36*** (.051)
1.31*** (.049)
1.35*** (.051)
1.36*** (.051)
1.32*** (.050)
Income-only means test (MT1)
0.91*** (.013)
0.91*** (.013)
Income/asset means test (MT2)
1.03 (.024)
1.01 (.025)
Homestead exemption cap (HC)
0.83** (.065)
0.79*** (.063)
Bankruptcy reform*income-only means test (BR*MT1)
1.06*
(.023) 1.07**
(.023)
Bankruptcy reform* income/asset means test (BR*MT2)
1.06 (.048)
1.081 (.047)
Bankruptcy 1.28* 1.25*
26
reform*homestead exemption cap (BR*HC)
(.135) (.130)
Notes: : ***, ** and * indicate whether the coefficient is significantly different from one at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in parentheses. All equations include the control variables shown in the Appendix, plus month and state dummies.
Table 5:
Results of Placebo Tests
Using Fake Dates for Bankruptcy Reform
Three Months Before to Three Months After Bankruptcy Reform
Prime
Mortgages
Subprime
Mortgages
Prime
Mortgages
Subprime
Mortgages
June 2005
February 2006
Bankruptcy reform (BR)
1.30** (.117)
1.26*** (.058)
0.55*** (.031)
0.71*** (.021)
Income-only means test (MT1) 0.69*** (.044)
0.88*** (.019)
0.96 (.040)
0.91*** (.017)
Income/asset means test (MT2) 0.83*** (.043)
0.97 (.073)
0.83*** (.037)
1.02 (.028)
Homestead exemption cap (HC) 0.97 (.0157)
0.84 (.336)
1.02 (.098)
0.85** (.060)
Bankruptcy reform*income-only means test (BR*MT1)
0.76** (.086)
0.91* (.037)
0.80** (.071)
0.99 (.031)
Bankruptcy reform* income/asset means test (BR*MT2)
1.02 (.085)
1.10 (.164)
0.98 (.067)
1.12* (.050)
Bankruptcy reform*homestead exemption cap (BR*HC)
1.13 (.317)
1.13 (.785)
0.83 (.182)
0.72** (.100)
Notes: ***, ** and * indicate whether the coefficient is significantly different from one at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in parentheses. All equations include the control variables shown in the Appendix, plus month and state dummies.
27
Table 6:
Number of Additional Mortgage Defaults
Resulting from the 2005 Bankruptcy Reform
Bankruptcy Reform
Income-only Means Test
Income/Asset Means Test
Homestead Exemption Cap
Total mortgages originated in 2004-05
22,000,000 22,000,000 22,000,000 22,000,000
Prime mortgages:
Proportion of all mortgages originated in 2004-05
.81 .81 .81
Proportion affected by the change
1.00 .266 .314
Default rate/year .024 .024 .015
Increase in default rate after bankruptcy reform
.29 .33 .196
Subprime mortgages:
Proportion of all mortgages originated in 2004-05
.19 .19 .19
Proportion affected by the change
1.00 .435 .014
Default rate/year .147 .132 .153
Increase in default rate after bankruptcy reform
.27 .055 .378
Number of additional
mortgage defaults/year
288,000 52,000 16,000 3,000
Note: Mortgage default rates are converted from monthly to yearly using the conversion
factor ∑ =−
11
0)1(
t
td , where d is the monthly default rate.
28
Appendix:
Cox Proportional Hazard Models Explaining Mortgage Default:
Results for Control Variables
Three Months Before to Three Months After Bankruptcy Reform
Prime Mortgages Subprime Mortgages
If FICO score 650 to 750 3.33 (.247)*** 1.75 (.216)*
If FICO score 550 to 650 11.5 (.884)*** 3.93 (.479)*
If FICO score 350 to 550 30.1 (2.93)*** 6.56 (.812)*
If FICO score is missing 1.10 (.060) 0.843 (.021)***
Debt payment-to-income ratio > 0.5 1.10 (.078) 1.13 (.045)**
Debt payment-to-income ratio (0.4 to 0.5) 1.22 (.063)*** 1.17 (.028)***
Loan-to-value ratio > 1.0 1.61 (.150)*** 4.94 (.839)***
Loan-to-value ratio (0.8 to 1.0) 1.87 (.078)*** 0.950 (.016)**
If full documentation 0.900 (.061) 1.019 (.067)
If partial documentation 1.12 (.092) 1.28 (.101)**
If documentation information missing 0.835 (.074)* 1.02 (.076)
If single-family house 1.04 (.043) 1.15 (.025)***
If fixed rate mortgage 0.788 (.032)*** 0.693 (.016)***
If jumbo loan 0.98 (.072) 1.12 (.037)***
If vacation home 1.09 (.087) 1.069 (.077)
If investment property 0.968 (.073) 0.953 (.035)
If occupancy type missing 1.28 (.061)*** 1.18 (.064)**
If loan was to re-finance 0.870 (.036) 0.832 (.014)***
If mortgage was securitized 1.18 (.060)*** 0.796 (.021)***
If loan was originated by the lender 0.682 (.044)*** 0.683 (.017)***
If loan was acquired wholesale, but not from a mortgage broker 0.0.882 (.061) 0.777 (.024)***
If loan was acquired from a correspondent lender 0.848 (.056)* 0.694 (.023)***
Homeowner’s gain from refinancing 0.309 (.085)*** 0.128 (.010)***
Lagged average mortgage default rate (zipcode) 1.091 (.029)*** 1.08 (.008)***
Lagged unemployment rate (MSA) 1.043 (.017)** 1.05 (.007)***
Lagged real income growth rate (state) 0.031 (.085)*** 0.157 (.038)***
State and month dummies? Y Y
Notes: Results for MT1, MT2, HC and the interaction terms are given in table 3, column (1). The sample period is from July 2005 through January 2006, excluding October 2005.
29
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