Yale School of Management
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New Haven, CT 06511
NBER Working Papers and Publications
|March 2014||Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?|
with Wenli Li, Michelle J. White: w19952
We assess the credit market impact of allowing mortgage "strip-down"--that is, reducing the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 13 bankruptcy. Our identification is provided by a series of U.S. Circuit Court of Appeals decisions in the early 1990's that introduced mortgage strip-down in parts of the U.S., followed by a 1993 Supreme Court ruling that abolished it all over the U.S. We find that the Supreme Court decision led to a short-term reduction of 3% in mortgage interest rates and a short-term increase of 1% in mortgage approval rates, but only the approval rate effect persists in longer sample periods. In contrast, the circuit court decisions to allow strip-down did not have consistent effects on mortg...