Consumption, Debt, and Portfolio Choice: Testing the Effects of Bankruptcy Law

Lehnert, Andreas; Maki, Dean M.

doi:10.1057/9780230608917_4

Cited by 26 publications

(7 citation statements)

References 16 publications

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“…Deficiency judgment: I code a state as forbidding deficiency judgments if they are not permitted under the foreclosure process (judicial or power of sale) that is standard in that state. Lehnert and Maki (2002) Appendix A 1994 and 1995 homestead and personal property exemptions, by state, for unmarried households. I use the natural log of the exemptions because their distributions have long right tails.…”

Section: Resultsmentioning

confidence: 99%

Foreclosing on Opportunity: State Laws and Mortgage Credit

Pence¹

2006

rev econ stat

118

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Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages. Many states protect borrowers by imposing restrictions on the foreclosure process; these restrictions, in turn, impose large costs on lenders. Lenders may respond to these higher costs by reducing loan supply; borrowers may respond to the protections imbedded in these laws by demanding larger mortgages. I examine empirically the effect of the laws on equilibrium loan size. I exploit the rich geographic information available in the 1994 and 1995 Home Mortgage Disclosure Act data to compare mortgage applications for properties located in census tracts that border each other, yet are located in different states. Using semiparametric estimation methods, I find that defaulter-friendly foreclosure laws are correlated with a four percent to six percent decrease in loan size. This result suggests that defaulter-friendly foreclosure laws impose costs on borrowers at the time of loan origination.

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Section: Resultsmentioning

confidence: 99%

Foreclosing on Opportunity: State Laws and Mortgage Credit

Pence¹

2006

rev econ stat

118

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“…As with others, we find that MEW propensity rises with house price appreciation and incentives to lower mortgage interest rates. In runs not shown, variables for state laws affecting bankruptcy (Lefgren and McIntyre, 2009;Lehnert and Maki, 2007) were insignificant. 4 Our main financial literacy measure for portfolio diversification is significantly correlated (0.177, standard error of 0.063) with whether a household head is a college graduate, while the correlations with heads having only some college or a high school degree were not statistically significant.…”

Section: Basic Model Specification and Estimation Detailsmentioning

confidence: 95%

Financial literacy and mortgage equity withdrawals

Duca

Kumar

2014

Journal of Urban Economics

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a b s t r a c tMortgage equity withdrawals (MEW) are correlated with covariates consistent with a permanent income framework augmented for credit-constraints. We assess linkages between MEW and financial literacy/ education using the Health and Retirement Study (HRS) and Panel Study of Income Dynamics (PSID). We find that the financially literate are 3-5 percentage points less likely to withdraw housing equity via non-home equity loan mortgages using the HRS, while college graduates are 5 percentage points less likely than those without a high school degree in the PSID. Among those withdrawing housing equity in the PSID, college graduates extract significantly less equity and are less likely to have high levels of housing leverage after doing so.

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“…Recent literature examines the links between cross-state variation in lending laws and loan quality. Based on variables used by Lehnert and Maki (2007) and Lefgren and McIntyre (2009), we control for differences in laws about what portion of a bankrupt borrower's 1income is shielded from garnishment (Garnish) and 2what percent of real estate assets are shielded by homestead exemptions from nonmortgage lenders (Homestead, scaled as a percent of median existing house prices, National Association of Realtors). 4 Using another data source, 5 we also control for whether (3) lenders need to file a lawsuit to start the foreclosure process (Judicial = 1 if only judicial proceedings allowed, .5 if nonjudicial and judicial are allowed, and 0 if only or predominantly nonjudicial) or (4) mortgage lenders have access to other borrower assets or income if there is a shortfall between the principal (plus fees) and the net value of real estate collateral collected on a repossessed home (Deficiency=1 if allowed, 0 if not or impractical).…”

Section: Cross-state Differences In Bankruptcy and Default Lawsmentioning

confidence: 99%

Financial Literacy and Mortgage Equity Withdrawals

Duca¹,

Kumar²

2011

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The recent U.S. consumption boom and the subsequent surge in mortgage defaults have been linked to mortgage equity withdrawals (MEWs). MEWs are correlated with covariates consistent with a permanent income framework augmented for credit-constraints. Nevertheless, many households are financially illiterate. We assess the unexplored linkages between "active MEW" and measures of financial literacy using panel data from the Health and Retirement Study (HRS). Findings indicate that declines in mortgage interest rates encouraged MEWs. Nevertheless, financially illiterate households were significantly more likely to withdraw housing equity via traditional first or second mortgages (including cash-out mortgage refinancings but not home equity loans). We find that the financially less savvy are 3-5 percentage points more likely to engage in this type of MEW relative to those who answered financial literacy questions correctly. Also significant were state differences in debtor versus creditor interests in bankruptcy, with loan demand effects outweighing loan supply effects across states.

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Consumption, Debt, and Portfolio Choice: Testing the Effects of Bankruptcy Law

Cited by 26 publications

References 16 publications

Foreclosing on Opportunity: State Laws and Mortgage Credit

Foreclosing on Opportunity: State Laws and Mortgage Credit

Financial literacy and mortgage equity withdrawals

Financial Literacy and Mortgage Equity Withdrawals

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