Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Mortgage Market?

Wenli Li (), Ishani Tewari () and Michelle J. White ()
Additional contact information
Wenli Li: Research Department, Federal Reserve Bank of Philadelphia
Ishani Tewari: Curry College
Michelle J. White: University of California

Journal of Financial Services Research, 2019, vol. 55, issue 1, No 3, 59-87

Abstract: Abstract We assess the credit market impact of mortgage “strip-down” -- reducing the principal of underwater residential mortgages to the current market value of the property for homeowners who file for bankruptcy under Chapter 7 or Chapter 13. Strip-down of residential mortgages in bankruptcy was proposed in 2009 as a means of reducing foreclosures during the Great Recession but was blocked by lenders on the grounds that it would greatly increase the cost of mortgage loans. Our goal is to test this hypothesis and determine whether the change would in fact have a large adverse impact on mortgage availability. Our identification is provided by a series of U.S. Court of Appeals decisions in the late 1980s and early 1990s that introduced mortgage strip-down under both bankruptcy Chapters in parts of the U.S., followed by two Supreme Court rulings that abolished mortgage strip-down all over the country. We find that neither the circuit court decisions to allow strip-down nor the Supreme Court decisions to abolish it had any significant effect on either mortgage availability or mortgage interest rates. The lack of systematic response suggests that, at least during normal economic times when bankruptcy and foreclosure rates are low, introducing mortgage strip-down under bankruptcy would not adversely affect mortgage loan availability and could be a useful new policy tool to reduce foreclosures.

Keywords: Mortgage credit; Strip-down; Creditor protection; Bankruptcy (search for similar items in EconPapers)
JEL-codes: G14 G18 K10 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10693-017-0278-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jfsres:v:55:y:2019:i:1:d:10.1007_s10693-017-0278-1

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10693

DOI: 10.1007/s10693-017-0278-1

Access Statistics for this article

Journal of Financial Services Research is currently edited by Haluk Unal

More articles in Journal of Financial Services Research from Springer, Western Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().