Macroeconomic Effects of Bankruptcy & Foreclosure Policies
89 Pages Posted: 3 Jun 2011 Last revised: 19 Jun 2015
Date Written: June 13, 2015
I develop an equilibrium model of housing and default to jointly analyze the effects of bankruptcy and foreclosure policies. Heterogeneous households have access to mortgages and unsecured credit and can default separately on both types of debt. I show that the interaction between foreclosure and bankruptcy decisions is crucial for explaining the observed cross-state correlation between default policies and default rates. I use the model to argue that a major recent reform to bankruptcy reduced bankruptcy rates but increased foreclosure rates, and that the Home Affordable Refinance Program reduced foreclosures during the Great Recession.
Keywords: Bankruptcy, Foreclosure, Housing, Default Risk, Household Debt
JEL Classification: E21, G11, K35, R21
Suggested Citation: Suggested Citation