Seismic Effects of the Bankruptcy Reform Did BAPCPA Burst the House Bubble

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Seismic Effects of the
Bankruptcy Reform(Did BAPCPA Burst the House
Bubble Boost Foreclosures?)

• Donald Morgan and Benjamin Iverson
• Bank Structure Conference,
• Federal Reserve Bank of Chicago
• May 8, 2009
• Research Officer (FRBNY), Ph.D. Student
  (Harvard)
• Our views are not necessarily those of the
  Federal Reserve or Harvard.

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Why Subprime Foreclosures Rose?

• Usual Suspects
• Home price deflation
• Excess credit supply/securitization
• Rising interest rates

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New Suspect BAPCPA(Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005)

• Reduces supply of bankruptcy protection
• fees tripled
• limits cram-down on auto loans
• residency requirement limits access to exemptions
• means test limits access to Ch. 7

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Why Suspect BAR?

• Pre-BAR, over-indebted mortgagors could free up
  cash-flow by filing bankruptcy and have credit
  card debt discharged and auto loan crammed down
• Reform blocks maneuver with means test etc.,
  hence higher foreclosures or forced home sales

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Prima facie evidence? Subprime Foreclosures
Surged Home Prices Peaked with BAPCPA.
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Practitioner Testimony and Predictions

• many debtors file bankruptcy precisely so that
  they can pay their mortgage by discharging other
  debts. Berkowitz and Hynes (1998) original
  emphasis.
• If covered by your states homestead
  exemption, Ch. 7 may be the way to goby getting
  rid of most your other debts, keeping up the
  mortgage will be just that much easier
  Bankruptcy for Dummies (2006)
• People get in over their heads by further
  encumbering their homes with equity lines of
  creditThen, when interest rates rise, and home
  values stop increasing, they can no longer
  refinance and file a Chapter 7 bankruptcy
  petition to wipe out their unsecured debts and
  hold off foreclosure by their lenderNow they
  must file under Chapter 13, and pay off their
  debt in 60 months or less. Middle income families
  in this position could face the loss of their
  homes Ms. Alexis McGee, President
  Foreclosure.com, Business Wire, April 25, 2005.

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Circumstantial Evidence Before BAR, Past due
mortgages/past due credit card loans improved
when bankruptcy filings Increased
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Identifying Impact of BAPCPA on Foreclosures, etc.

• Look across states and credit markets
• Bigger impact in states with high bankruptcy
  demand, i.e, high exemption (X) states
• X opposite of collateral
• Smaller impact in low X states

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Diff-in-Diff Predictions

• After BAPCPA, in high X (exemption) states
• subprime foreclosures surge more,
• prime foreclosures invariant
• unsecured personal loan delinquency improve.
• auto loans more secure cheaper (due to reduced
  cramdown)
• home prices fall more

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Data

• State level
• Multiple markets
• Windows
• Pre-BAPCPA 19981 20054
• Post-BAPCPA 20061 20073
• Sources see paper

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Diff-in-Diff Regression

• Yst a as a t ßBAPCPAX
  ?BAPCPAUNLIM_X est.
• Yst foreclosure rate (subprime or prime)
• delinquency (personal loan or auto)
• home prices
• Controls unemployment, log(income), income
  growth, home prices
• Complete regression results in paper.

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Subprime Foreclosures Rose More Since BAR in
States with Higher, Finite, Exemptions.
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Selected Regression Coefficients (Table 3)
- Impact (2) ? for median X state, foreclosure
rate 12.6 higher than average before ?
32k more foreclosures per quarter - St. dev in
HOME APP ? 48k
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Auto Loan Interest Spreads Fell After BAR,
Especially in Unlimited Exemption States.
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Higher House Prices Steeper Declines Post-BAR
in Higher X States (new, tentative result)
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Seismic Effects of BAPCPA Summary

• Shifted risk
• unsecured (credit card) under-secured (upside
  down auto loans) safer
• secured riskier
• Impact
• subprime foreclosures surged
• home prices peaked
• cheaper auto credit
• Was BAPCPA the needle that burst the buggle and
  boosted foreclosures?

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Reference Slides
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Ch. 7 v. Ch. 13

• Ch. 7 Þ liquidate nonexempt home equity
• remaining unsecured debts
  discharged
• keep future income
• Ch. 13 Þ reschedule/keep all assets so long as
  maintain payments
• Sweet spot for over-indebted mortgagor with
  positive equity Ch. 7 in high exemption state

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Did BAR Make Auto Credit Cheaper and Safer?
(selected diff-in-diff regression
coefficients-Table 4)
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Home Prices Peaked with BAR
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Housing Bust Coincides with BAPCPA
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Higher Rush Before BAPCPA in Higher Exemption
States
Ashcraft, Dick, Morgan (2007)