Bankruptcy Exemptions and the Market for Mortgage Loans

Abstract

The recent explosion in personal bankruptcy filings has motivated research into whether credit markets are being adversely affected by generous legal provisions. Empirically, this question is examined by comparing credit conditions and bankruptcy exemptions across states. We note that the literature has focused on aggregate household credit, making no distinction between secured and unsecured credit. We argue that such aggregation obscures important differences in forms of credit. Most significantly, property exemptions do not prevent the home mortgage creditor from foreclosing on the home if not fully repaid. We argue that some property exemptions may in fact have some beneficial effects for home mortgage lenders. Using both household-level data and state-level data, we show that in the 1990's high exemption levels have tended to reduce mortgage rates and reduce the probability of being denied a mortgage.

US and European Household Debt and Credit Constraints

“…2 Note that empirical evidence for the US is equivocal as to whether an applicant is more likely to be turned down for credit in States where exemptions are high. Gropp et al (1997) and Lin and White (2001) suggest they are, Berkowitz and Hynes (1999) suggest the opposite. Gropp et al (1997) suggest that lenders increased supply to satisfy greater demand by high asset households in high exemption States, but did not increase supply to low asset households.…”

How Does Personal Bankruptcy Law Affect Startups?

“…Finally, Berkowitz, and Hynes (1999) and Lin and White (2001) study whether exemptions affect mortgages.…”

The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit

“…Berkowitz and Hynes (1999) and Lin and White (2001) analyze the demand for mortgages and come to competing conclusions on the impact of state exemption levels.…”