Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?

Wenli Li, Ishani Tewari and Michelle White

No 4722, CESifo Working Paper Series from CESifo

Abstract: We assess the credit market impact of allowing mortgage “strip-down” as a foreclosure-prevention measure, where strip-down reduces the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 13 bankruptcy. Our identification is provided by a series of U.S. court decisions that introduced strip-down in parts of the U.S. and a Supreme Court ruling that abolished it. We find that the Supreme Court decision led to a small, short-term reduction in mortgage interest rates and a small, short-term increase in mortgage approval rates, but no long-term effects, and the circuit court decisions did not consistently affect mortgage terms. These results suggest that strip-down would be an effective foreclosure-prevention program, because it would have only small and transient effects on the supply of mortgage loans.

Keywords: mortgage; foreclosure; credit market; credit supply; strip-down (search for similar items in EconPapers)
JEL-codes: K35 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Working Paper: Using bankruptcy to reduce foreclosures: does strip-down of mortgages affect the supply of mortgage credit? (2014)
Working Paper: Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit? (2014)
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