Bankruptcy Exemptions and the Market for Mortgage Loans


The recent explosion in personal bankruptcy filings has motivated research into whether credit markets are being adversely affected by generous legal provisions. Empirically, this question is examined by comparing credit conditions and bankruptcy exemptions across states. We note that the literature has focused on aggregate household credit, making no distinction between secured and unsecured credit. We argue that such aggregation obscures important differences in forms of credit. Most significantly, property exemptions do not prevent the home mortgage creditor from foreclosing on the home if not fully repaid. This makes it unlikely that the home mortgage lender will be adversely affected by the exemptions. We argue further that some property exemptions may in fact have some beneficial effects for home mortgage lenders. Using both household-level data and state-level data, we show that in the 1990's high exemption levels have not tended to increase mortgage rates or increase the probability of being denied a mortgage. Acknowledgments: We gratefully acknowledge helpful input from Raphael Bostic, Steven Coate, Arthur Kennickel, Steven Morris, Eric Posner, Nicholas Souleles, Martha StarrMcCluer, Petra Todd and Michelle White. All remaining errors and inaccuracies are ours. The opinions expressed herein do not necessarily represent those of the Federal Reserve Board or its staff.

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@inproceedings{Hynes1997BankruptcyEA, title={Bankruptcy Exemptions and the Market for Mortgage Loans}, author={Richard M. Hynes and Jeremy Berkowitz and Anthony M. Santomero and Raphael W. Bostic and Steven Coate and Arthur Kennickel and Steven Morris and Eric A. Posner and Nicholas Souleles and Martha L. Starr}, year={1997} }