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Effects of Bankruptcy Asset Exemptions and Foreclosure Laws on Mortgage Default and Foreclosure Rates

36 Pages Posted: 28 Jan 2010 Last revised: 17 Feb 2012

Chintal A. Desai

Virginia Commonwealth University (VCU)

Gregory Elliehausen

George Washington University - Financial Services Research Program

Jevgenijs Steinbuks

Purdue University - Center for Global Trade Analysis; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP); World Bank - Development Research Group (DECRG)

Date Written: December 15, 2010

Abstract

This study analyzes whether bankruptcy asset exemptions and state foreclosure laws affect borrowers’ decisions to default on their mortgages and the lenders’ incentives to settle the default outside the foreclosure. Using a rigorously specified empirical model and accounting for endogenous loan terms, we find significant variation in the effects of both bankruptcy asset exemptions and mortgage foreclosure laws on mortgage defaults across different segments of the mortgage market. Certain provisions of foreclosure laws, such as judicial foreclosure, are associated with a higher level of mortgage defaults, and lenders operating in these states prefer to settle the defaulted loans out-of-foreclosure. We also find a statistically significant non-linear relationship between bankruptcy asset exemptions and mortgage defaults.

Keywords: home equity exemptions, foreclosure laws, mortgage defaults, mortgage foreclosures, personal bankruptcy, personal property exemptions, portfolio choice, unsecured debt

JEL Classification: D14, G21, K35

Suggested Citation

Desai, Chintal A. and Elliehausen, Gregory and Steinbuks, Jevgenijs, Effects of Bankruptcy Asset Exemptions and Foreclosure Laws on Mortgage Default and Foreclosure Rates (December 15, 2010). Available at SSRN: https://ssrn.com/abstract=1543876 or http://dx.doi.org/10.2139/ssrn.1543876

Chintal Ajitbhai Desai

Virginia Commonwealth University (VCU) ( email )

1015 Floyd Avenue
Richmond, VA 23284
United States

Gregory Elliehausen

George Washington University - Financial Services Research Program ( email )

Duques Hall, Suite 551
2201 G Street, NW
Washington, DC 20052
United States
202-994-0892 (Phone)
202-994-0907 (Fax)

Jevgenijs Steinbuks (Contact Author)

Purdue University - Center for Global Trade Analysis ( email )

1145 Krannert Building
West Lafayette, IN 47907
United States

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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