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Donald Morgan* and Benjamin Iverson§
Bank Structure Conference, Federal Reserve Bank of Chicago
May 8, 2009
*Research Officer (FRBNY), §Ph.D. Student (Harvard)Our views are not necessarily those of the Federal Reserve or Harvard.
Usual Suspects◦ Home price deflation
◦ Excess credit supply/securitization
◦ Rising interest rates
Reduces “supply” of bankruptcy protection
◦ fees tripled
◦ limits cram-down on auto loans
◦ residency requirement limits access to exemptions
◦ means test limits access to Ch. 7
Pre-BAR, over-indebted mortgagors could free up cash-flow by filing bankruptcy and have credit card debt discharged and auto loan crammed down
Reform blocks maneuver with means test etc., hence higher foreclosures or forced home sales
“…many debtors file bankruptcy precisely so that they can pay their mortgage… by discharging other debts.” Berkowitz and Hynes (1998) original emphasis.
“ If … covered by your state’s homestead exemption, Ch. 7 may be
the way to go…by getting rid of most your other debts, keeping up the mortgage will be just that much easier” Bankruptcy for Dummies (2006)
“[P]eople get in over their heads by further encumbering their homes with equity lines of credit…Then, when interest rates rise, and home values stop increasing, they can no longer refinance and file a Chapter 7 bankruptcy petition to wipe out their [unsecured] debts and hold off foreclosure by their lender…[Now] they must file under Chapter 13, and pay off their debt in 60 months or less. Middle income families in this position could face the loss of their homes” Ms. Alexis McGee, President Foreclosure.com, Business Wire, April 25, 2005.
.3.4
.5.6
.7.8
late
mort
ga
ge
s %
/la
te c
redit c
ard
%
02
00
00
04
00
00
06
00
00
08
00
00
0to
tal filin
gs
1991q1 1995q1 1999q1 2003q1 2007q1qdate
total filings late mortgages %/late credit card %
Look across states and credit markets
◦ Bigger impact in states with high bankruptcy demand, i.e, high exemption (X) states
◦ X opposite of collateral;
◦ Smaller impact in low X states
After BAPCPA, in high X (exemption) states
1. subprime foreclosures surge more,
2. prime foreclosures invariant
3. unsecured personal loan delinquency improve.
4. auto loans more secure & cheaper (due to reduced cramdown)
5. home prices fall more
State level
Multiple markets
Windows: ◦ Pre-BAPCPA: 1998:1 – 2005:4 ◦ Post-BAPCPA: 2006:1 – 2007:3
Sources: see paper
Yst = α + as + α t + βBAPCPA∙X + `BAPCPA∙UNLIM_X …+ εst.
Yst = foreclosure rate (subprime or prime)
delinquency (personal loan or auto)
home prices
Controls = unemployment, log(income), income growth, home prices
Complete regression results in paper.
AK
ALAR
AZ
CA
COCT
DCDE
FL
GA
HI
IA
ID
ILIN KSKY
LA
MA
MD
ME
MI
MN
MOMS
MTNC
ND
NE
NH
NJ
NM
NV
NY
OHOK
ORPA
RI
SC
SD
TNTX
UT
VA VT
WA
WI
WV
WY
-100
010
020
030
0
Per
cent
Cha
nge
in S
ubpr
ime
For
eclo
sure
(Pre
BA
R -
Pos
t BA
R)
0 100 200 300 400 500 ... Unlim.Single homestead exemption ($000s)
Sources: State Laws & Statutes, Mortgage Bankers Association
Difference in subprime foreclosure rate equals percent change in average rate fromseven quarters before BAR (2004:2-2005:4) to seven quarters after (2006:1-2007:3)
Dependent Variable: Mortgage Foreclosure Rate: Personal Loan
Subprime Prime Delinquency Rate
(2)
BAPCPA X∙2.85**
* 2.04*** 0.07 -0.06 -0.78*** -0.84***
BAPCPA UNLIM ∙X 0.81 0.68 0.04 0.02 -0.12 -0.16
HOME APP. -0.11*** -0.01*** 0.01
UNEMP. 0.53* 0.12*** 0.14**- Impact: (2) → for median X state, foreclosure rate 12.6 % higher than average before
→ 32k more foreclosures per quarter - St. dev in HOME APP → 48k “ “
BA
R
22.
53
3.5
44.
5
-40
-20
020
40
1999m7 2001m7 2003m7 2005m7 2007m7
Unlimited spread Limited spreadUnlimited - limited gap
Dependent Variable:House
Price LevelHouse Price Appreciation
BAPCPA*X 36.66** -3.30**
BAPCPA*Unlim. X -3.04 -1.66
% of subprime loans in foreclosure -6.09*** -0.65***
Unemployment rate -5.95 -2.01***
Log(per capita income) 117.08 -1.48
Per capita income annual growth -0.36 0.07
Shifted risk ◦ unsecured (credit card) & under-secured (upside
down auto loans) safer ◦ secured riskier
Impact ◦ subprime foreclosures surged◦ home prices peaked ◦ cheaper auto credit
Was BAPCPA the needle that burst the buggle and boosted foreclosures?
Ch. 7liquidate nonexempt home equity; remaining unsecured debts discharged;
keep future income
Ch. 13 reschedule/keep all assets so long as maintain payments
Sweet spot for over-indebted mortgagor with positive equity: Ch. 7 in high exemption state
Delinquency Rate on Auto Loan Spread Direct Auto Loans Indirect Auto loans
BAR X∙ -0.09 -0.14 -0.25 -0.34 -0.17 -0.09
BAR UNLIM ∙X -0.11 -0.15* -0.62** -0.67** -0.20 -0.13
Unscaled Exemptions
BAR∙X -0.05* -0.06** -0.02 -0.04 -0.02 0.01
BAR∙UNLIM X -0.12 -0.15* -0.57* -0.62** -0.18 -0.11
(selected diff-in-diff regression coefficients-Table 4)
AKALAR
AZ
CACO
CT
DC
DE
GAHI
ID
ILIN
KY
LA
MA
MD
ME
MI
MN
MO
MS
MTNCNDNE
NH
NJ
NM
NV
NYOH
OR
PA
RI
SCTN
UT
VA
VT
WA
WI
WVWY
020
40
60
80
100
0 100 200 300 400 500Homestead exemption ($000s)
2005Q4 over 2005Q3One-Quarter Percent Change in Chapter 7 Filings
Ashcraft, Dick, Morgan (2007)