NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Did Bankruptcy Reform Cause Mortgage Default to Rise?

Wenli Li, Michelle J. White, Ning Zhu

NBER Working Paper No. 15968
Issued in May 2010
NBER Program(s):   LE

This paper argues that the U.S. bankruptcy reform of 2005 played an important role in the mortgage crisis and the current recession. When debtors file for bankruptcy, credit card debt and other types of debt are discharged—thus loosening debtors’ budget constraints. Homeowners in financial distress can therefore use bankruptcy to avoid losing their homes, since filing allows them to shift funds from paying other debts to paying their mortgages. But a major reform of U.S. bankruptcy law in 2005 raised the cost of filing and reduced the amount of debt that is discharged. We argue that an unintended consequence of the reform was to cause mortgage default rates to rise.

We estimate a hazard model to test whether the 2005 bankruptcy reform caused mortgage defaults to rise, using a large dataset of individual mortgages. Our major result is that prime and subprime mortgage default rates rose by 23% and 14%, respectively, after bankruptcy reform. We also use difference-in-difference to examine the effects of three provisions of bankruptcy reform that particularly harmed homeowners with high incomes and/or high assets and find that their default rates rose even more. Overall, we calculate that bankruptcy reform caused the mortgage default rate to rise by one percentage point even before the start of the financial crisis, suggesting that the reform increased the severity of the crisis when it came.

download in pdf format
   (514 K)

email paper

A non-technical summary of this paper is available in the August 2010 NBER digest.  You can sign up to receive the NBER Digest by email.

This paper is available as PDF (514 K) or via email.

This paper was revised on December 5, 2011

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Users who downloaded this paper also downloaded these:
Fernandez-Villaverde, Guerrón-Quintana, and Rubio-Ramírez w15929 Reading the Recent Monetary History of the U.S., 1959-2007
Li and White w15472 Mortgage Default, Foreclosure, and Bankruptcy
Greenstein w15905 Nurturing the Accumulation of Innovations: Lessons from the Internet
White w13265 Bankruptcy Reform and Credit Cards
Roberts and Schlenker w15921 Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the US Ethanol Mandate
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us