Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence

Michelle White and Wenli Li

No 1038, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we develop a theory where homeowners make joint decisions in financial distress as whether to file for bankruptcy or default on their mortgages. The theory models explicitly institutional details, the federal bankruptcy law and the state foreclosure laws, that govern the two default events separately and their interactions. In particular, we derive regions (defined by households asset, liability, and income positions) where homeowners default on both loans, on one of them, and on neither of them. We then test our model using a unique dataset where we match individual credit bureau information with their mortgage loan level information. We find that the data provide support to our theory. Furthermore, for our sample period, liquidity considerations contributed more to mortgage default than to bankruptcy filing. We also find significance difference between prime and subprime loans.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1038

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