Title: Seismic Effects of the Bankruptcy Reform Did BAPCPA Burst the House Bubble
1Seismic 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.
2Why Subprime Foreclosures Rose?
- Usual Suspects
- Home price deflation
- Excess credit supply/securitization
- Rising interest rates
3New 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
4Why 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
5Prima facie evidence? Subprime Foreclosures
Surged Home Prices Peaked with BAPCPA.
6Practitioner 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.
7Circumstantial Evidence Before BAR, Past due
mortgages/past due credit card loans improved
when bankruptcy filings Increased
8Identifying 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
9Diff-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
10Data
- State level
- Multiple markets
- Windows
- Pre-BAPCPA 19981 20054
- Post-BAPCPA 20061 20073
- Sources see paper
11Diff-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.
12Subprime Foreclosures Rose More Since BAR in
States with Higher, Finite, Exemptions.
13Selected 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
14Auto Loan Interest Spreads Fell After BAR,
Especially in Unlimited Exemption States.
15Higher House Prices Steeper Declines Post-BAR
in Higher X States (new, tentative result)
16Seismic 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?
17Reference Slides
18Ch. 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
19Did BAR Make Auto Credit Cheaper and Safer?
(selected diff-in-diff regression
coefficients-Table 4)
20Home Prices Peaked with BAR
21Housing Bust Coincides with BAPCPA
22Higher Rush Before BAPCPA in Higher Exemption
States
Ashcraft, Dick, Morgan (2007)