The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown

Jacelly C. Cespedes, Carlos R. Parra and Clemens Sialm

No 28900, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Mortgage cramdown enabled bankruptcy judges to discharge the underwater portion of a mortgage during Chapter 13 bankruptcy before the Supreme Court disallowed this practice in 1993. We exploit the random assignment of cases to judges to quantify the ex-post effects of Chapter 13 bankruptcy over the period from 1989 to 1993. We find that a successful Chapter 13 filing in a cramdown court substantially decreases the five-year foreclosure rate, the propensity to move, and the crime rate. Our results suggest that principal write-down considerably reduces homeowner’s distress.

JEL-codes: G21 G28 G41 G51 H31 H73 K25 K35 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-ure
Note: AP CF PE
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