Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit?

38 Pages Posted: 24 Apr 2014

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Ishani Tewari

Yale School of Management

Michelle J. White

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 24, 2014

Abstract

We assess the credit market impact of allowing mortgage “strip-down” as a foreclosure-prevention measure, where strip-down reduces the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 13 bankruptcy. Our identification is provided by a series of U.S. court decisions that introduced strip-down in parts of the U.S. and a Supreme Court ruling that abolished it. We find that the Supreme Court decision led to a small, short-term reduction in mortgage interest rates and a small, short-term increase in mortgage approval rates, but no long-term effects, and the circuit court decisions did not consistently affect mortgage terms. These results suggest that strip-down would be an effective foreclosure-prevention program, because it would have only small and transient effects on the supply of mortgage loans.

Keywords: mortgage, foreclosure, credit market, credit supply, strip-down

JEL Classification: K350

Suggested Citation

Li, Wenli and Tewari, Ishani and White, Michelle J., Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit? (March 24, 2014). CESifo Working Paper Series No. 4722. Available at SSRN: https://ssrn.com/abstract=2428631

Wenli Li

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Ishani Tewari

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Michelle J. White (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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