Mortgage Market Sensitivity to Bankruptcy Modification

Abstract

This paper examines the policy assumption underlying the special protection given to home mortgages in bankruptcy - namely that protecting lenders from losses in bankruptcy will encourage them to lend more and at lower rates, thus encouraging homeownership. This paper tests this policy assumption empirically using both current and historical mortgage market data. Current mortgage origination pricing, private mortgage insurance premiums, and secondary market pricing all indicate that mortgage markets are indifferent to bankruptcy modification risk. Historical mortgage pricing data from the 1980s and 1990s, when a particularly significant type of modification was permitted in almost half of federal judicial districts, also indicates that mortgage markets are largely indifferent to bankruptcy modification risk.

Keywords: bankruptcy modification, mortgage market