Bankruptcy Exemptions, Credit History, and the Mortgage Market

33 Pages Posted: 3 Oct 2004

See all articles by Ronel Elul

Ronel Elul

Federal Reserve Bank of Philadelphia

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Date Written: September 2004

Abstract

We develop and test a model of mortgage underwriting, with particular reference to the role of credit bureau scores. In our model scores are used in a standardized fashion, which reflects the prevalence of automated underwriting in industry practice. We show that our model has implications for the debate on the effect of personal bankruptcy exemptions on secured lending. Recent literature (Berkowitz and Hynes (1999), Lin and White (2001)) has developed conflicting theories - and found conflicting results - seeking to explain how exemptions affect the mortgage market.

By contrast, our model implies that when lenders use credit scores in a standardized manner, exemptions should be irrelevant to the mortgage underwriting decision. Merging data from a major credit bureau with the Home Mortgage Disclosure Act (HMDA) dataset, we confirm this prediction of our model. We also show that while ignoring borrower credit quality may make exemptions appear to be significant, once one controls for credit scores then exemptions have no effect on the likelihood that a mortgage application is approved. We confirm this empirically and argue that this may help explain some of the results of the previous literature.

Keywords: Personal Bankruptcy, Mortgage Underwriting, Credit Scores

JEL Classification: G33, J41, K12, O57

Suggested Citation

Elul, Ronel and Chomsisengphet, Souphala, Bankruptcy Exemptions, Credit History, and the Mortgage Market (September 2004). FRB Philadelphia Working Paper No. 04-14, Available at SSRN: https://ssrn.com/abstract=598231 or http://dx.doi.org/10.2139/ssrn.598231

Ronel Elul (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3965 (Phone)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

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