Did bankruptcy reform lead to looser mortgage lending standards? Evidence from the U.S. mortgage market 2000-2007

Prajakta Bhide (), Lucia Fiorito (), Zachary Noteman () and Kunal Sawardekar ()
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Prajakta Bhide: New York University
Lucia Fiorito: New York University
Zachary Noteman: New York University
Kunal Sawardekar: New York University

Ensayos de Política Económica, 2010, vol. 1, issue 4, 88-107

Abstract: This paper seeks to find an exogenous cause for deterioration in mortgage lending standards since 2005 that contributed to the subprime mortgage crisis in the U.S. We find that the new means test provision in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 was such an exogenous shock in the mortgage market. We show that the means test, which makes Chapter 7 bankruptcy unavailable to relatively better off borrowers, caused a shift in the supply of mortgage credit from better off borrowers to relatively poorer borrowers. Simultaneously, we found borrowers being charged higher interest rates, for all classes of income. Our findings imply that BAPCPA may be a contributing factor toward the deterioration of lending standards in the U.S. mortgage market.

Keywords: Bankruptcy; means test; mortgage default; lending standards (search for similar items in EconPapers)
JEL-codes: G01 G21 G33 K35 (search for similar items in EconPapers)
Date: 2010
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