The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown

73 Pages Posted: 20 Oct 2020 Last revised: 9 Jun 2023

See all articles by Jacelly Cespedes

Jacelly Cespedes

University of Minnesota - Carlson School of Management

Carlos Parra

Pontificia Universidad Católica de Chile - School of Business

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2023

Abstract

Mortgage cramdown enabled bankruptcy judges to discharge the underwater portion of a mortgage in a Chapter 13 bankruptcy until the Supreme Court disallowed this practice in 1993. We investigate the impact of mortgage cramdown on household distress exploiting the random assignment of cases to judges. We find that cramdown reduced the three-year foreclosure rate by between 15 and 20 percentage points. Our results suggest that large principal reductions considerably reduce homeowners’ distress through a reduction of debt overhang.

Keywords: Debt Relief, Principal Reduction, Debt Overhang, Foreclosures, Consumer Bankruptcy, Housing Policies

Suggested Citation

Cespedes, Jacelly and Parra, Carlos and Sialm, Clemens, The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown (June 8, 2023). Available at SSRN: https://ssrn.com/abstract=3700190 or http://dx.doi.org/10.2139/ssrn.3700190

Jacelly Cespedes (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://sites.google.com/site/jacellycespedes/

Carlos Parra

Pontificia Universidad Católica de Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

HOME PAGE: http://www.carlosrparra.com/

Clemens Sialm

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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