Macroeconomic Effects of Bankruptcy and Foreclosure Policies

85 Pages Posted: 20 Jan 2016

Date Written: January 2016

Abstract

I study the implications of two major debt-relief policies in the US: the Bankruptcy Abuse and Consumer Protection Act (BAPCPA) and the Home Affordable Refinance Program (HARP). To do so, I develop a model of housing and default that includes relevant dimensions of credit-market policy and captures rich heterogeneity in household balance sheets. The model also explains the observed cross-state variation in consumer default rates. I find that BAPCPA significantly reduced bankruptcy rates, but increased foreclosure rates when house prices fell. HARP reduced foreclosures by one percentage point and provided substantial welfare gains to households with high loan-to-value mortgages.

Keywords: bankruptcy, default risk, foreclosure, household debt, housing

JEL Classification: E21, G11, K35, R21

Suggested Citation

Mitman, Kurt, Macroeconomic Effects of Bankruptcy and Foreclosure Policies (January 2016). CEPR Discussion Paper No. DP11043. Available at SSRN: https://ssrn.com/abstract=2717592

Kurt Mitman (Contact Author)

IIES ( email )

Stockholm, SE-10691
Sweden

HOME PAGE: http://kurtmitman.com

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