Finance and Economics Discussion Series (FEDS)
February 1998
Bankruptcy Exemptions and the Market for Mortgage Loans
Richard M. Hynes and Jeremy Berkowitz
Abstract:
The recent explosion in personal bankruptcy filings has motivated research into whether credit markets are being adversely affected by generous legal provisions. Empirically, this question is examined by comparing credit conditions and bankruptcy exemptions across states. We note that the literature has focused on aggregate household credit, making no distinction between secured and unsecured credit. We argue that such aggregation obscures important differences in forms of credit. Most significantly, property exemptions do not prevent the home mortgage creditor from foreclosing on the home if not fully repaid. We argue that some property exemptions may in fact have some beneficial effects for home mortgage lenders. Using both household-level data and state-level data, we show that in the 1990's high exemption levels have tended to reduce mortgage rates and reduce the probability of being denied a mortgage.
Full paper (691 KB Postscript)Keywords: Bankruptcy, mortgages, secured credit
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.