Did Bankruptcy Reform Cause Mortgage Default to Rise? 1 · after bankruptcy reform. We also use difference-in-difference to examine the effects of three provisions of bankruptcy reform

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Did Bankruptcy Reform Cause Mortgage Default to Rise?1

Wenli Li, Federal Reserve Bank of Philadelphia

Michelle J. White,

UC San Diego and NBER and

Ning Zhu, University of California, Davis

JEL categories: K35, G21, G01, R21

Original draft: September 2009 Current draft: March 2010

1 We are grateful to Mark Watson at the Kansas Fed for his invaluable support on the LPS mortgage data, to Susheela Patwari for very capable research assistance and to Nick Souleles, Gordon Dahl, Ronel Elul, Richard Green, Joseph Doherty, and Ed Morrison for extremely helpful comments. The views expressed here are the authors’ and do not represent those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

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Abstract

This paper argues that the U.S. bankruptcy reform of 2005 played an important role in the mortgage crisis and the current recession. When debtors file for bankruptcy, credit

card debt and other types of unsecured debt are discharged—thus loosening debtors’

budget constraints. Homeowners in financial distress can therefore use bankruptcy to

avoid losing their homes, since filing allows them to shift funds from paying other debts

to paying their mortgages. But a major reform of U.S. bankruptcy law in 2005 raised the

cost of filing and reduced the amount of debt that is discharged in bankruptcy. We argue

that an unintended consequence of the reform was to cause mortgage default rates to rise.

We estimate a hazard model to test whether the 2005 bankruptcy reform caused

mortgage defaults to rise, using a large dataset of individual mortgages. Our major result

is that prime and subprime mortgage default rates rose by 29% and 27%, respectively,

after bankruptcy reform. We also use difference-in-difference to examine the effects of

three provisions of bankruptcy reform that particularly harmed homeowners who have

high incomes or high assets and we find that their default rates rose even more. Overall,

we calculate that bankruptcy reform caused around 360,000 additional mortgage defaults

per year, suggesting that the reform greatly increased the severity of the mortgage crisis

when it came.

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Introduction

The financial crisis and the recession of 2008-09 were triggered by the bursting of the

housing bubble and the subprime mortgage crisis that began in late 2006/early 2007. But

we argue in this paper that U.S. personal bankruptcy law also played an important role.

Because credit card debt and other types of unsecured debt are discharged in bankruptcy,

filing for bankruptcy loosens homeowners’ budget constraints and allows them to shift

funds from paying other debts to paying their mortgages. Bankruptcy thus gives

financially distressed homeowners a way to avoid losing their homes when their debts

exceed their ability-to-pay. The availability of debt relief in bankruptcy was widely

known, the costs of filing were low, and there was little stigma attached to filing. Even

debtors with high income and high assets could take advantage of bankruptcy. But a

major reform of U.S. bankruptcy law in 2005 raised the cost of filing and reduced the

amount of debt discharged. It therefore caused bankruptcy filings to fall sharply. In this

paper we argue that an unintended consequence of bankruptcy reform was to increase the

number of mortgage defaults by closing off a popular procedure that previously helped

many financially distressed homeowners to pay their mortgages. The reform therefore

contributed to the severity of the mortgage crisis by pushing up default rates even before

the crisis began.

We use a large dataset of mortgages to test whether mortgage defaults rose as a result

of the 2005 bankruptcy reform. We find that mortgage default rates rose between 25 and

30% after bankruptcy reform and that default rates of homeowners with high incomes or

high assets—who were particularly negatively affected by bankruptcy reform—rose by

even more. We estimate that the 2005 bankruptcy reform caused several hundred

thousand additional mortgage defaults to occur each year, thus adding greatly to the

severity of the mortgage crisis when it came.

Bernstein (2008) and Morgan, Iverson and Botsch (2008) first suggested that the

2005 bankruptcy reform caused mortgage defaults to rise. Bernstein did not provide any

empirical tests. Morgan et al hypothesized that bankruptcy reform caused default rates to

increase by more in states with high homestead exemptions, because homeowners in

these states gained the most from filing for bankruptcy prior to the reform. They tested

this hypothesis by examining whether foreclosure rates rose by more in states with higher

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exemptions. But the 2005 bankruptcy reform did not in fact change the treatment of

homestead exemption levels in bankruptcy, except by imposing a $125,000 cap on the

homestead exemption for a small fraction of homeowners. As a result, their test is not

very precise and they in fact did not find very strong support for their hypothesis.2 Also

because Morgan et al used aggregate state-year data covering a long time period, they

were unable to distinguish between the effects of bankruptcy reform versus the mortgage

crisis on default rates. In contrast, we examine the relationship between bankruptcy

reform and mortgage default using a large dataset of individual mortgages and a short

time period that ends before the start of the mortgage crisis. Our data also allow us to

examine how particular provisions of the 2005 bankruptcy reform affected default rates

of homeowners who were affected by these provisions.

Our paper also relates to the recent literature explaining mortgage default, including

Keys, Mukherjee, Seru and Vig (2007), Gerardi, Shapiro and Willen (2007), Mayer,

Pence, and Sherlund (2008), Demyanyk and van Hemert (2008), Rajan, Seru and Vig

(2009), Elul (2009), and Jiang, Nelson, and Vytlacil (2009). We add to this literature by

showing that bankruptcy law is another important factor explaining default.

The paper proceeds as follows. We start by discussing how U.S. bankruptcy law

treats mortgage debt and how the 2005 bankruptcy reform affected homeowners’

incentives to default on their mortgages. We then describe our dataset, our empirical

model, and the results. In last section, we estimate how many additional mortgage

defaults occurred starting in 2006 as a result of bankruptcy reform.

U.S. Bankruptcy Law and the 2005 Bankruptcy Reform3

US bankruptcy law provides two separate personal bankruptcy procedures—Chapter

7 and Chapter 13—and both help financially distressed homeowners keep their homes.

Prior to 2005, all debtors were allowed to choose between them. Under Chapter 7, most

2 They tested whether foreclosure rates rose by more after bankruptcy reform in states with higher or unlimited homestead exemptions, using separate dataset for prime and subprime mortgage foreclosures. They found a positive and significant relationship only for subprime mortgages in states with higher, but not unlimited, homestead exemptions. 3 See White (2007) and White and Zhu (2010) for further discussion of the 2005 bankruptcy reform and how it affected homeowners.

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unsecured debts are discharged. Debtors are only obliged to use their assets above an

asset exemption level to repay unsecured debt; their future earnings are entirely exempt.

States set the asset exemption levels and have different exemptions for different types of

assets, but the homestead exemption for equity in an owner-occupied home is the largest

in nearly all states. In states with high homestead exemptions, even debtors with high

assets and high income may gain from filing for bankruptcy under Chapter 7. Under

Chapter 13, debtors must have regular earnings and must follow a court-supervised plan

to repay some of their debt from future earnings over a 3 to 5-year period. They are also

obliged to use their non-exempt assets—if any—to repay.

How does filing for bankruptcy help homeowners in financial distress? Consider

Chapter 7 first. Homeowners who wish to save their homes gain from filing under

Chapter 7, because discharge of unsecured debt increases their ability to pay their

mortgages. 4 In addition, filing under Chapter 7 stops mortgage lenders from foreclosing

for a few months, which gives homeowners who have fallen behind on their mortgage

payments additional time to pay. But the terms of residential mortgage contracts cannot

be changed in Chapter 7. Thus filing under Chapter 7 helps homeowners save their

homes, but only if they can pay all they owe on their mortgages within a few months.

Homeowners also gain from filing under Chapter 7 if they do not plan to save their

homes, because the delay in foreclosure proceedings during bankruptcy means they get

cost-free housing for several months. 5 Filing also benefits homeowners who have

positive home equity, since delay gives them more time to sell their homes privately and

obtain the highest price. If foreclosure has already occurred, then mortgage lenders in

some states have a claim against former homeowners for the difference between the

amount due on the mortgage and the sale price of the home—called a “deficiency

judgment.” These judgments are discharged in Chapter 7.

Homeowners’ gain from filing under Chapter 7 can be expressed as:

777 ]0,max[7 CXAHUrGainChapte A −−−+=

4 Berkowitz and Hynes (1999) first suggested that filing for bankruptcy helps homeowners keep their homes by reducing their unsecured debt. 5 In some states, homeowners can even stay in their homes through foreclosure, which means that they become tenants and the lender (now the landlord) must go through an eviction procedure to force them to leave (Elias, 2008).

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7U is the value of unsecured debt discharged in Chapter 7. Homeowners receive this gain

in bankruptcy regardless of whether they keep their homes or not. 7H is the reduction in

the present value of future housing costs when homeowners file under Chapter 7. If

homeowners save their homes in Chapter 7, then 7H is small or zero. But if they give up

their homes, then 7H equals the reduction in the present value of future housing costs

when they shift from owning to renting. This includes homeowners’ gain from having

cost-free housing during bankruptcy and from having deficiency judgments discharged,

plus their gain from reducing their housing costs by renting rather than owning.

]0,max[ AXA− equals the value of homeowners’ non-exempt assets, where A denotes

the value of homeowners’ assets and AX is the state’s homestead exemption.6

Homeowners who have non-exempt assets must use them to repay unsecured debt in

bankruptcy and, as a result, they rarely file for bankruptcy since their homes will be sold

as part of the bankruptcy procedure. Finally, 7C is homeowners’ cost of filing for

bankruptcy under Chapter 7, including both time costs and out-of-pocket costs.

Homeowners in financial distress who wish to save their homes often benefit more

by filing for bankruptcy under Chapter 13. While the terms of first mortgages cannot be

changed in bankruptcy, homeowners in Chapter 13 are allowed to spread repayment of

their mortgage arrears, plus interest, over the period of their repayment plans. They must

also make all of their normal mortgage payments during the plan, but lenders cannot

proceed with foreclosure as long as homeowners are making the required payments. If

homeowners complete all of the payments specified in the plan, then the original

mortgage contract is reinstated. Thus Chapter 13 allows homeowners to save their

homes even if they have large mortgage arrears, by giving them several years to repay.

Prior to 2005, homeowners proposed their own Chapter 13 plans and were allowed to

choose the length of the repayment period and the amount of unsecured debt to be repaid.

They frequently proposed plans that repaid their mortgage arrears in full, but paid only a

6 Financial assets other than home equity are not generally exempt in bankruptcy. But homeowners who plan in advance can convert financial assets into home equity by paying down their mortgages. They are allowed to keep the additional home equity in bankruptcy as long as their total home equity is less than the homestead exemption.

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token amount to unsecured creditors. Bankruptcy judges generally accepted these plans

as long as homeowners would not be required to repay any of their unsecured debt if they

filed under Chapter 7. 7 Also in Chapter 13, second mortgages are sometimes discharged

if they are completely underwater and bankruptcy trustees sometimes challenge fees and

penalties that mortgage lenders add to the mortgage payments. 8

Homeowners also gain from filing under Chapter 13 if they do not plan to save their

homes, or if they decide after filing that they cannot afford to save their homes. The

same amount of unsecured debt is discharged in Chapter 13 as in Chapter 7 and car loans

can also be partially discharged in Chapter 13. Also homeowners can delay foreclosure

and live cost-free in their homes for longer in Chapter 13 than in Chapter 7, particularly if

they propose and then withdraw several repayment plans.

Homeowners’ gain from filing under Chapter 13 can be expressed as:

.]0,max[13 1313131313 CXAIHCUrGainChapte A −−−−++=

Here 13U refers to unsecured debt discharged in Chapter 13, where 13U = 7U for most

filers. 13C is the value of car debt that can be discharged only in Chapter 13. 13H is the

reduction in the present value of the future cost of housing when homeowners file under

Chapter 13. If homeowners keep their homes in Chapter 13, then 13H equals the

reduction in the present value of the cost of owning due to discharge of second

mortgages, home equity loans, fees and/or penalties. If homeowners move to rental

housing, then 13H equals the difference between the cost of renting versus owning,

including homeowners’ gain from having cost-free housing during the bankruptcy

process. 13I denotes the present value of future income that must be used to repay

unsecured debt in Chapter 13; prior to 2005 this was generally only a token amount.

7 Debtors are obliged to repay unsecured debt from home equity in Chapter 13 because the “best interests of creditors” test, § 1129(a)(7) of the U.S. Bankruptcy Code, requires that unsecured creditors receive no less in Chapter 13 than they would receive in Chapter 7. These payments are made over five years as part of the debtor’s repayment plan. 8 Having a second mortgage discharged in Chapter 13 requires that a valuation hearing be held, which raises bankruptcy costs. For more detailed discussion of how Chapter 13 affects homeowners, see Elias (2006), Eggum, Porter and Twomey (2008), Carroll and Li (2008). Porter (2008) discusses how mortgage lenders often add excessive fees to mortgages in default.

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]0,max[ AXA− is again the value of non-exempt assets that homeowners must use to

repay unsecured debt. Finally, 13C is homeowners’ cost of filing for bankruptcy under

Chapter 13, where 13C exceeds 7C .

Thus prior to 2005, the availability of bankruptcy both reduced default rates by

increasing homeowners’ ability to pay their mortgages and increased default rates by

reducing the cost to homeowners of giving up their homes. Overall, bankruptcy had

mixed effects on homeowners’ default incentives.

Now consider how the 2005 bankruptcy reform changed homeowners’ gains from

filing for bankruptcy and defaulting on their mortgages. The reform made several

important changes in bankruptcy law. First, it raised homeowners’ costs of filing.

According to a study by the Government Accountability Office (2008), debtors’ median

filing costs rose from $700 to $1,100 under Chapter 7 and from $2,000 to $3,000 under

Chapter 13. In addition, debtors in Chapter 13 must pay a fee to the Chapter 13 trustee

which may be as high as 10% of the amount specified in their repayment plans. Debtors’

costs of filing also rose because of new requirements that they undergo credit counseling

before filing, take a course in debt management during the bankruptcy process, and

provide extensive documentation of their income and assets—including copies of past tax

returns. Higher filing costs are predicted to reduce homeowners’ probability of filing for

bankruptcy and to raise default rates for homeowners who would previously have used

bankruptcy to save their homes.

Second, the reform introduced a new “means test” that forces some high-income

homeowners to file under Chapter 13 and to repay some of their unsecured debt from

future income. Suppose homeowners have no non-exempt assets. They first compute

their average family income during the six months before filing and convert it to a yearly

income figure, denoted I. Then they compare their income to the median family income

level in the state, adjusted for family size. State median income levels vary widely, from

$46,000 for a family of three in Mississippi to $85,000 for a family of the same size in

New Jersey and Connecticut. If family income I is less than the state median income

level, then the homeowner is allowed to file under Chapter 7. But if homeowners’

income exceeds the state median level, then they must compute individualized income

exemptions. They start with pre-determined allowances for housing costs, transport

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costs, and personal expenses. Then they add their mortgage and car loan payments in

excess of the pre-determined housing and transport allowances. Finally they add a list of

other allowed expenses. 9 Their yearly income exemption under the means test, denoted

IX , equals the total. Homeowners’ non-exempt income equals income minus the

income exemption, or IXI − . If IXI − exceeds $2,000 per year, then homeowners

must file under Chapter 13 if they file for bankruptcy at all and they must use all of their

non-exempt income for five years, or )(5 IXI − , to repay debt. Since homeowners’

obligation to repay debt from future income was a token amount prior to bankruptcy

reform, those with high incomes now benefit less from filing for bankruptcy. These

homeowners are predicted to default on their mortgages more often. We refer to this test

as the “income-only means test.”

Third, the reform also harmed some homeowners who have both non-exempt income

and non-exempt assets. Prior to the reform, these homeowners were obliged to use their

non-exempt assets, AXA − , to repay unsecured debt in bankruptcy and they were also

obliged to use a token amount of future income to repay if they filed under Chapter 13.

After the reform, their obligation to repay equals the maximum of their non-exempt

assets, AXA− , or their non-exempt income over 5 years, )(5 IXI − . Thus homeowners

who have non-exempt income in excess of their non-exempt assets, or

AI XAXI −>− )(5 , gain less from filing after bankruptcy reform. We refer to this test

as the “income/asset means test.”

Finally, the reform imposed a new cap on the homestead exemption which limits the

asset exemption AX to a maximum of $125,000. In order to be affected by the cap,

homeowners must have home equity exceeding $125,000, must live in one of the ten

states that have homestead exemptions greater than $125,000, and must have owned their

9 The pre-determined amounts for housing, transport costs and personal expenses are taken from Internal Revenue Service procedures for collecting from delinquent taxpayers. They vary by location and, for personal expenses, by family size and income. See www.justice.gov/ust/eo/bapcpa/20090315/meanstesting.htm. Other allowed expenses include the costs of caring for elderly or disabled relatives, some children’s education expenses, tax payments, mandatory payroll deductions, costs of home security, and telecommunication costs.

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homes for less than 3½ years. 10 Few homeowners are subject to the cap, but those

affected found filing for bankruptcy much less attractive after the reform, since they are

now forced to give up their homes in bankruptcy and repay much more of their unsecured

debt. The new cap is therefore predicted to increase mortgage default.

Our predictions are therefore as follows: (1) The mortgage default rate is predicted

to rise for all homeowners following the 2005 bankruptcy reform, because filing for

bankruptcy became more costly. (2) The default rate of homeowners who fail the new

means test is predicted to rise after bankruptcy reform, since after the reform they must

use some of their future income to repay unsecured debt in bankruptcy and they therefore

gain less from filing. (3) The default rate of homeowners who both fail the new means

test and have non-exempt income exceeding their non-exempt assets is also predicted to

rise, because they must repay more after bankruptcy reform. (4) The default rate of

homeowners who are subject to the cap on the homestead exemption is predicted to rise

after bankruptcy reform, since the cap forces them to give up their homes in bankruptcy.

Table 1 shows the three groups of homeowners who were particularly negatively

affected by bankruptcy reform as a function of whether they have non-exempt assets

and/or non-exempt income. In the next section, we test the predictions that homeowners

in general are more likely to default on their mortgages after bankruptcy reform and that

homeowners in the three negatively-affected groups are even more likely to default after

bankruptcy reform.11

Data and summary statistics

We use data for individual mortgages from LPS Applied Analytics, Inc., which

includes detailed information from the time of mortgage origination, plus updates each

month on whether homeowners paid their mortgages in full and whether they filed for

bankruptcy. Both prime and subprime mortgages are covered. Our sample consists of

10 States that have unlimited homestead exemptions are Arkansas, Florida, Iowa, Kansas, Oklahoma, Texas, and the District of Columbia. In addition, Arizona had a homestead exemption of $150,000 in 2005; Massachusetts $500,000; Minnesota $200,000; and Nevada $200,000, raised to $350,000 in 2006. See Elias (2007) and earlier editions. 11 We neglect other changes made under the 2005 bankruptcy reform, since their effects cannot be tested with our data. See Morgan et al (2008) for discussion of how bankruptcy reform affected car loans.

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first-lien, 30 year mortgages used for home purchase or refinance. All mortgages

originated between January 2004 and December 2005 and were in effect during at least

part of our sample period. We follow them until they are repaid in full, go into default, or

until the sample period ends.

Following the literature, we construct separate samples of prime and subprime

mortgages.12 Our prime and subprime samples contain approximately 380,000 and

269,000 separate mortgages, respectively.13 Because the LPS data do not include any

demographic characteristics for homeowners, we merge the LPS data with data from the

Home Mortgage Disclosure Act (HMDA) to get homeowners’ income, sex, race, and

marital status at the time of mortgage origination.14 We also add other local-level

macroeconomic data and state-level bankruptcy information. 15

Because bankruptcy reform went into effect in the middle of October 2005, we delete

October 2005 observations from our dataset. Our sample period is three months before

bankruptcy reform to three months after. We intentionally use a short sample period so

12 We use lenders’ classifications concerning whether individual mortgages are prime versus subprime. The prime mortgage category includes alt-A mortgages, which are considered to be intermediate between prime and subprime. Alt-A borrowers generally do not provide full documentation of income and assets. 13 We start with a 10% random sample of LPS prime mortgages that originated in 2004 or 2005 and were still in effect in July 2005. With the loss of observations resulting from the HMDA match (see below), our final sample is approximately 5% of the LPS dataset. Because LPS under-represents subprime mortgages, we start with all subprime mortgages in the dataset, but end up with a final sample of approximately 50%. 14 HMDA data cover nearly all mortgage originations. Mortgages were matched based on the zipcode of the property, the date when the mortgage originated (within 5 days), the origination amount (within $500), the purpose of the loan (purchase, refinance or other), the type of loan (conventional, VA guaranteed, FHA guaranteed or other), occupancy type (owner-occupied or non-owner-occupied), and lien status (first-lien or other). The match rate was 48%. We calculated summary statistics for all the variables that are included in this study and found no significant differences between the means of the matched observations and the original LPS dataset. This suggests that the matched observations are a random subset of the original LPS dataset. See www.ffiec.gov/hmda/history.htm for information on HMDA data. 15 Additional variables include unemployment rates by metropolitan area taken from the Bureau of Labor Statistics; income data by state taken from the Bureau of Economic Analysis; housing price data by metropolitan area taken from the Federal Housing Finance Agency; bankruptcy exemption levels by state taken from Elias (2006 and earlier editions); and median state income levels taken from the U.S. Trustee Program at the Department of Justice. See below for discussion of how we use these variables.

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that other aspects of the economic environment remain fairly constant and so that the

sample period ends before the mortgage crisis began. Our sample sizes are

approximately 2.2 million and 1.5 million monthly observations for the prime and

subprime mortgage samples, respectively. We also rerun the model on a longer sample

period from six months before to six months after bankruptcy reform.

We define mortgage default to occur when payments become 60 days delinquent.

Figure 1 gives mortgage default rates for the prime and subprime mortgage samples

during the period six months before to six months versus after bankruptcy reform. Both

default rates jumped when bankruptcy reform went into effect, with a particularly large

increase for prime mortgages.

Now turn to how we calculate dummy variables to represent the three groups of

homeowners who are particularly negatively affected by bankruptcy reform. To do so,

we need to calculate homeowners’ non-exempt income and non-exempt home equity.

We have data on family income at the time of mortgage origination, but we do not have

all the information needed to calculate individual income exemptions according to the

procedure specified by bankruptcy law. Instead, we use the state median income level as

a proxy for the income exemption IX ; thus homeowners’ non-exempt income equals

family income minus the state median income level, or else zero, or ]0,max[ IXI − .16 To

calculate non-exempt home equity, we first calculate the current value of the home by

updating home value at the time of mortgage origination using the average monthly

change in housing values in the homeowner’s metropolitan area since the date of

origination. 17 We also know the mortgage principle each month, so that home equity

equals the current value of the house minus the current mortgage principle. Non-exempt

home equity then equals the current value of home equity minus the homestead

16 The state median income level is a natural proxy for the income exemption, since it is used to determine whether homeowners must go through the procedure of calculating individual income exemptions, including revealing all of the relevant information. 17 If the homeowner lives in a non-metropolitan area, we update the value of the house using the average change in housing values in the non-metropolitan areas of the state.

Note that our estimates of home equity are biased upward, since we ignore second

mortgages—for which we have no data.

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exemption. We assume that homeowners have no assets other than their home equity, so

that non-exempt home equity equals ]0,max[ AXA − .

Define 1MT to denote homeowners who are harmed by the income-only means test.

MT1 equals one if homeowners have non-exempt income, but no non-exempt home

equity, or if >− IXI 0 and 0≤− AXA . Also define 2MT to denote homeowners who

are harmed by the income/asset means test. MT2 equals one if homeowners have both

non-exempt income and non-exempt home equity and if the former exceeds the latter, or

if >− IXI 0>− AXA . In addition, define HC to denote homeowners who are harmed

by the homestead exemption cap. HC equals one if homeowners have non-exempt home

equity exceeding $125,000, or if 000,125>− AXA , and if their mortgages were for

purchase rather than refinance. (We assume that homeowners whose mortgages were for

refinance are not subject to the cap because they have owned their homes for more than

3½ years.) Finally, BR denotes months when the 2005 bankruptcy reform was in effect.

Specification

We estimate a Cox proportional hazard model of mortgage default, where the

baseline hazard depends on the age of the mortgage in months (see Kiefer, 1988). We

use a proportional hazard model because we are explaining time to default and because

the hazard model takes account of both left- and right-censoring. Both types of censoring

are important for our purposes, since we use a short sample period and therefore nearly

all of our mortgages originate before the sample period starts and/or continue after the

sample period ends. The hazard of default rises with mortgage age in our data, peaking at

15 months and 10 months for prime and subprime mortgages, respectively, and then

declining.18

The key variables affecting mortgage default are the dummy variable BR for months

when bankruptcy reform was in effect, the three separate dummy variables MT1, MT2

and HC for groups of homeowners that were particularly harmed by bankruptcy reform,

and interactions of BR with MT1, MT2 and HC. The key results are the coefficient of the

bankruptcy reform dummy, which measures the overall increase in default rates after

18 Jiang et al (2009) and Demyanyk and van Hemert (2008) find a similar pattern of rising default rates as mortgage age increases, using different datasets.

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bankruptcy reform went into effect, and the three difference-in-difference terms, which

measure whether default rates rise by more after bankruptcy reform for homeowners in

each of the three groups that were particularly harmed by bankruptcy reform.

Ai and Norton (2003) pointed out that, while difference-in-differences in linear

models equal the coefficients of interaction terms, this result does not carry over to non-

linear models. Instead difference-in-differences in non-linear models must be calculated

by evaluating the full estimated model, including all of the results for the control

variables. We compute corrected difference-in-differences for the hazard model using

this procedure.19

Our choice of control variables is guided by the recent literature on mortgage default

(see references above). Our demographic variables are whether the homeowner is

married, is African-American, or is female. We include dummy variables representing

ranges of FICO scores (the highest category is omitted), ranges of loan-to-value ratios

and ranges of debt-to-income ratios (the lowest categories are omitted). 20 We also

include dummy variables for whether the loan is a jumbo, whether it is fixed-rate (versus

adjustable rate or hybrid), whether it is for refinance (versus purchase), whether

homeowners provided full documentation of income and assets when applying for the

mortgage, provided partial documentation, or whether documentation information is

missing (the omitted category is no documentation), whether the property is single-

family, and whether it is a vacation home or an investment property (the omitted category

is primary residences). Additional dummy variables include whether the mortgage was

securitized and whether it was originated by the lender that services it, acquired

wholesale, or acquired from a correspondent (the omitted category is mortgages

19 The difference-in-difference for the homestead exemption cap equals

)1,0(ˆ/)]1,0(ˆ)1,1(ˆ[ ====−== BRHCDBRHCDBRHCD -

)0,0(ˆ/)]0,0(ˆ)0,1(ˆ[ ====−== BRHCDBRHCDBRHCD , where )1,1(ˆ == BRHCD

denotes the predicted probability of default when HC = 1, BR = 1, and the other variables in the model are evaluated using their estimated coefficients. Other difference-in-difference terms are calculated using the same procedure. We also compute corrected values for the coefficients of BR, MT1, MT2 and HC. The only papers we have found that use a hazard model to estimate interaction terms and compute difference-in-differences correctly are Chen (2008), which uses a much smaller dataset, and Elul et al (2010). We use Stata 11 for these calculations. 20 Debt-to-income ratios include second mortgages and non-mortgage debt.

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originated by independent mortgage brokers).21 We also include a variable measuring

homeowners’ benefit from refinancing their mortgages at the currently-available interest

rate—this variable takes higher values when interest rates on new mortgages are lower.22

We also include the lagged unemployment rate in the metropolitan area, the lagged real

income growth rate in the state, and the lagged average mortgage default rate in the

homeowner’s zipcode. (All lags are one month.) Finally we include state and month

fixed effects. We cluster observations by mortgage.

Table 2 gives summary statistics for both samples. 23 The default rate of 1.3% per

month for subprime mortgages is far higher than the default rate of 0.2% per month for

prime mortgages. Another striking difference is that 44% of subprime mortgage-holders

are harmed by the income-only means test, compared to only 27% of prime mortgage-

holders. This suggests that subprime mortgage-holders were much more likely to

overstate their incomes on their loan applications. Subprime mortgage-holders also

have far lower FICO scores and higher debt-to-income ratios and loan-to-value ratios

than prime mortgage-holders.

Results

Table 3 gives the results for the base case hazard model, using the sample period

three months before to three months after bankruptcy reform. Only the results for the

control variables are listed (results for the other variables are given in table 5). The

results are in the form of proportional increases/decreases in default rates when the

explanatory variable increases by one unit, depending on whether the figures given are

21 Correspondents are mortgage brokers that originate mortgages only for a single lender; while independent mortgage brokers sell to multiple lenders. Correspondents’ interests are more closely aligned with the interests of banks than those of independent mortgage brokers. See Jiang et al (2009) for discussion of the role of mortgage brokers and Keys et al (2008) for discussion of the role of securitization in explaining default. 22 This variable equals {r0[1-(1+rt)

t-M]}/{ rt[1-(1+r0)t-M]}, where r0 is the interest rate on

the homeowner’s existing mortgage, rt is the interest rate currently available on new mortgages, and M is time to maturity. See Richard and Roll (1989). 23 Most of the control variables are observed only at the time of mortgage origination; table 3 shows which variables are updated each month. We do not include the monthly rate of increase of house prices in the metropolitan area as a control, since this information is used in constructing the dummy variables for the income/asset means test and the homestead exemption cap.

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greater than/less than one. Tests of statistical significance are for whether the results

differ significantly from one. Results for the controls are generally similar to those in

the literature: homeowners are more likely to default when they have lower FICO scores,

higher debt-to-income ratios and higher loan-to-value ratios. All of the results for

variables representing mortgage sources are less than one, implying that mortgages

originated by independent mortgage brokers—the omitted category—are the most likely

to default.24 Prime mortgages that were securitized are more likely to default, but—

surprisingly— subprime mortgages that were securitized are less likely to default.25

Another surprising result is that the documentation variables are generally insignificant,

suggesting that higher levels of documentation are not associated with reduced likelihood

of default.26 We also find that homeowners are more likely to default if they live in

zipcodes with higher lagged average mortgage default rates, in metropolitan areas with

higher lagged unemployment rates, and in states with lower lagged real income growth

rates.

Table 4 gives the results for the key variables. Because the interaction terms are

correlated with each other and with the bankruptcy reform dummy, we show the results

when they enter both individually and together. In both samples, the adoption of

bankruptcy reform led to a substantial increase in mortgage default rates—29% for prime

mortgages and 27% for subprime mortgages—and both are strongly statistically

significant (p < .001). The results for MT1, MT2 and HC are either below one or greater

than one but insignificant. Since these variables are correlated with higher income or

assets, they are associated with lower default rates.

24 This is similar to the results of Jiang et al (2009), who use different data. 25 See Keys et al (2008) and Rajan et al (2009) for discussion of the relationship between securitization and default. Both papers argue that securitization led to a decline over time in the quality of “soft” information collected about borrowers whose mortgages were likely to be securitized and this in turn led to higher default rates for securitized mortgages. 26 This contrasts with the results of Jiang et al (2009) and Sherlund (2008), who both found that low-doc and no-doc mortgages were more likely to default. However Jiang et al find that borrowers are more likely to choose low-doc loans when they have high income and/or credit scores, which may explain the lack of strong positive relationship between low- or no-doc loans and default.

17

Now turn to the difference-in-differences. Prime mortgage-holders’ default rates

increased by more after bankruptcy reform if they were harmed by either of the two

means tests: using the results in column (5), default rates rose by 33% more if prime

mortgage-holders were harmed by the income-only means test and by 20% if they were

harmed by the income/asset means test. Both results are significant at the 1% level or

higher. Prime mortgage-holders’ default rates also increased by 15% more if they were

harmed by the homestead exemption cap, but the result is not statistically significant. For

subprime mortgage-holders, the difference-in-differences for the two means tests are also

positive as expected, but smaller in magnitude, and only the result for the income-only

means test approaches statistical significance—it is 6% (p = .061). But the difference-in-

difference for the homestead exemption cap is large and statistically significant at 38% (p

= .02). The results for the means tests suggest that many subprime mortgage-holders

exaggerated their income levels in applying for loans and therefore were harmed less by

the adoption of the means test than prime mortgage-holders. The results for the

homestead exemption cap suggest that even when subprime mortgage-holders have high

home equity, they are more prone to financial distress than prime mortgage-holders,

presumably because subprime mortgage-holders have fewer financial resources other

than their home equity.

In order to determine whether the effect of bankruptcy reform on default was

temporary, we ran the same model using a sample period of six months before to six

months after bankruptcy reform. (We again dropped October 2005). This period, while

longer, still ends before the mortgage crisis began. The results, shown in table 4, are

similar to those in table 3. The overall increase in default rates after bankruptcy reform is

26% for homeowners with prime mortgages and 32% for homeowners with subprime

mortgages (using the results in column (5)), and both are strongly statistically significant

(p < .01). The results for prime mortgage-holders again show much bigger increases in

default rates after bankruptcy reform for those who are harmed by either of the two

means tests: the difference-in-differences are now 19% for the income-only means test

and 24% for the income/asset means tests (p < .001 for both). For subprime mortgage-

holders, the results are similar to those in the shorter sample period, with the difference-

in-difference terms for the two means tests positive but smaller than in the prime

18

mortgage sample—they are now 7% (p = .005) for the income-only means test and 8% (p

= .092) for the income/asset means test, while the difference-in-difference for the

homestead exemption cap is 25% and significant at the 5% level. Thus the results are

similar over the longer sample period.

As robustness checks, we ran placebo tests assuming bankruptcy reform went into

effect in June 2005 or February 2006, rather than the actual date of October 2005. We

again used a sample period of 3 months before to three months after the “date” of

bankruptcy reform. The results, shown in table 5 for the combined regression show that,

with one exception, the difference-in-differences all either become negative (less than

one) or remain positive but are insignificant. However the results for BR show that the

number of mortgage defaults increases significantly in June 2005 and falls significantly

in February 2006; this is because the number of mortgage defaults is trending upward

before the true date of bankruptcy reform and trending downward after the true date of

bankruptcy reform and BR captures these trends when set to a fake date (as in figure 1).

We also reran the models in tables 4 and 5, but clustered the errors by zipcode rather than

by mortgage. The results (not shown) remained virtually unchanged.

Overall, the results support our hypotheses that bankruptcy reform led to a general

increase in mortgage default rates because filing for bankruptcy became more costly and

to an even larger increase in mortgage default rates for homeowners who were harmed by

the adoption of the two means tests and the homestead exemption cap. Our results also

suggest that bankruptcy reform caused mortgage default rates to rise more than just

temporarily.

Conclusion

Our main result is that the 2005 bankruptcy reform caused mortgage default rates

to rise. Using the results for the three-month period before versus after bankruptcy

reform, we find that the default rate of homeowners with prime and subprime mortgages

rose by 29% and 27%, respectively. Default rates of homeowners who fail the new

means test or are subject to the new cap on the homestead exemption rose by even more,

compared to the increase for homeowners not subject to these provisions. The

difference-in-differences for the two means tests are larger for prime mortgage-holders,

19

suggesting that subprime mortgage-holders were more likely to exaggerate their incomes;

while the difference-in-difference for the cap on the homestead exemption is larger for

subprime mortgage-holders. These results suggest that bankruptcy reform squeezed

homeowners’ budget constraints by making bankruptcy filings more expensive and by

reducing the amount of debt discharge in bankruptcy. The reform therefore increased

mortgage default by closing off a popular procedure that previously helped financially

distressed homeowners to save their homes. Our results suggest that bankruptcy reform

contributed to the severity of the mortgage crisis by causing mortgage default to rise even

before the mortgage crisis began.

We can use these results to predict the number of additional mortgage defaults that

occurred as a result of the 2005 bankruptcy reform. Consider first the general effect of

the increase in the cost of filing for bankruptcy. There were 22 million mortgage

originations during the period 2004-05, of which approximately 81% were prime and

19% were subprime (Mayer and Pence, 2008). Default rates in our sample are .025 and

.145 per year and the adoption of bankruptcy reform caused default rates to rise by .29

and .27 for prime and subprime mortgages, respectively. Using the mortgages originated

in these years as a base, we calculate that the adoption of bankruptcy reform caused the

number of mortgage defaults per year to increase by 288,000. (See table 6.) In addition,

the adoption of the means test and the homestead exemption cap are also predicted to

increase default. Using the same approach, the income-only means test is predicted to

cause 50,000 additional defaults per year by homeowners who fail the test, the

income/asset means test is predicted to cause 16,000 additional defaults per year by

homeowners with prime mortgages who fail the test, and the cap on the homestead

exemption is predicted to cause 3,000 additional defaults per year by subprime mortgage-

holders who are subject to the cap. The total increase in yearly mortgage defaults due to

the three provisions is therefore 66,000. Thus even before the mortgage crisis began, the

2005 bankruptcy reform was responsible for around 360,000 additional mortgage defaults

per year by homeowners who obtained their mortgages in 2004-05. This figure would be

even higher if the model were applied to other mortgage cohorts.

The Bush and Obama Administration have both tried a number of programs to deal

with the housing crisis by encouraging mortgage lenders to renegotiate mortgages rather

20

than foreclose when homeowners default. None of these programs have been very

successful. Our results suggest that a simple change such as rolling back the cost of

filing for bankruptcy to pre-2005 levels would help in dealing with the housing crisis by

substantially reducing the number of mortgage defaults.

27

27 The figure for the number of additional defaults by homeowners who fail the income-only means test is 22,000,000(.81*.266*.0018*.33*11.86 + .19*.435*.0117*.055 *11.12) = 46,000, where .266 and .435 are the proportions of prime and subprime mortgage-holders who fail the test, .0018 and .0117 are the monthly default rates of prime and subprime mortgages who fail the test, and .33 and .055 are the proportional increases in the default rates of prime and subprime mortgage-holders who fail the test, respectively. The number of additional defaults by homeowners with prime mortgages who fail the income/asset means test is 22,000,000*(.81*.314*.0012*.196*11.86) = 16,000, where .314 is the proportion of prime mortgage-holders who fail the test, .0012 is the default rate of prime mortgage-holders who fail the test, and .196 is the proportional increase in the default rate after bankruptcy reform of prime mortgage-holders who fail the test. The number of additional defaults by subprime mortgage-holders who are subject to the homestead exemption cap after bankruptcy reform is 22,000,000*(.19*.014*.0137* .378*11.12) = 3,000, where .014 is the proportion of subprime mortgage-holders who are subject to the cap, .0137 is the default rate of subprime mortgage-holders subject to the cap, and .378 is the proportional increase in the default rate after bankruptcy reform of subprime mortgage-holders subject to the cap. We do not calculate increases in the number of defaults for subprime mortgage-holders who fail the income/asset means test or for prime mortgage-holders who are subject to the cap on the homestead exemption, since these changes are not statistically significant in the 3-month sample. See the previous footnote for data sources.

21

Figure 1:

Average Mortgage Default Rates

Six Months Before and Six Months After Bankruptcy Reform

0

0.0005

0.001

0.0015

0.002

0.0025

0.003

Prime mortgages

0

0.005

0.01

0.015

0.02

Subprime mortgages

22

Table 1:

Effect of the 2005 Bankruptcy Reform on

Homeowners’ Obligation to Repay in Bankruptcy

All home equity exempt Some home equity non-exempt

All income

exempt

No change Must repay more if homestead exemption cap is

binding (HC = 1);

otherwise no change

Some income

non-exempt

Must repay more (MT1 = 1)

Must repay more if non-exempt income > non-exempt home equity

(MT2 = 1); otherwise no change

Note: prior to the 2005 bankruptcy reform, all income was exempt.

23

Table 2: Summary Statistics

Three Months Before to Three Months After Bankruptcy Reform

Prime Mortgages Subprime Mortgages

Default rate per month 0.0020 (.045) 0.0132 (.114)

Homestead exemption cap (HC) 0.0472 (.212) 0.0136 (.116)

Income-based means test (MT1) 0.266 (.442) 0.435 (.496)

Income/asset means test (MT2) 0.314 (.464) 0.121 (.326)

Average income* $102,000 (91,000) $72,800 (59,000) If FICO score 650 to 750* 0.521 (.500) 0.231 (.421) If FICO score 550 to 650* 0.138 (.345) 0.625 (.484) If FICO score 350 to 550* 0.0073 (.085) 0.124 (.330)

Debt payment-to-income ratio > 0.5* 0.083 (.276) 0.044 (.205)

Debt payment-to-income ratio (0.4, 0.5)* 0.119 (.324) 0.191 (.394)

Debt payment-to-income ratio missing* 0.344 (.475) 0.526 (.499)

Loan-to-value ratio > 1.0* 0.017 (.131) 0.00025 (.016)

Loan-to-value ratio (0.8,1.0)* 0.219 (.413) 0.385 (.486)

If full documentation* 0.368 (.482) 0.563 (.496)

If partial documentation* 0.077 (.266) 0.023 (.149)

If documentation information missing* 0.159 (.365) 0.107 (.309)

If single-family house* 0.747 (.434) 0.808 (.393)

If fixed rate mortgage* 0.609 (.488) 0.246 (.431)

If jumbo loan* 0.147 (.354) 0.087 (.281)

If vacation home* 0.040 (.196) 0.010 (.101)

If investment property* 0.051 (.220) 0.050 (.218)

If occupancy type missing* 0.194 (.395) 0.050 (.219)

If loan was to re-finance* 0.351 (.477) 0.523 (.499)

If mortgage was securitized 0.242 (.429) 0.822 (.382)

If loan was originated by the lender 0.515 (.500) 0.434 (.495)

If loan was acquired wholesale, but not from a mortgage broker 0.194 (.396) 0.172 (.377)

If loan was acquired from a correspondent lender 0.221 (.415) 0.102 (.303)

Homeowner’s gain from refinancing 1.07 (.239) 0.839 (.145)

Lagged cumulative delinquency rate (zipcode) 0.091 (.321) 0.341 (.726)

Lagged unemployment rate (MSA) 0.046 (.013) 0.047 (.013)

Lagged real income growth rate (state) 0.0019 (.024) 0.0020 (.033)

Notes: The sample period is from July 2005 through January 2006, excluding October 2005. Variables marked with asterisks are observed only at origination. Summary statistics for these variables are computed based on values at the time of origination; while summary statistics for variables without asterisks are averages over all months of data. Debt-to-income ratios are available starting January 2005.

24

Table 3:

Results of Cox Proportional Hazard Models Explaining Mortgage Default


Prime Mortgages

(1) (2) (3) (4) (5)

Bankruptcy reform (BR)

1.29*** (.085)

1.28*** (.085)

1.29*** (.086)

1.28*** (.085)

1.29*** (.086)

Income-only means test (MT1)

0.94 (.036)

0.87*** (.036)

Income/asset means test (MT2)

0.81*** (.035)

0.77*** (.035)

Homestead exemption cap (HC)

1.06 (.108)

1.08 (.114)

Bankruptcy reform*income-only means test (BR*MT1)

1.31***

(.069) 1.33***

(.067)

Bankruptcy reform*income/asset means test (BR*MT2)

1.10 (.067)

1.20** (.066)

Bankruptcy reform*homestead exemption cap (BR*HC)

1.31 (.213)

1.15 (.229)

Subprime Mortgages

(1) (2) (3) (4) (5)


1.29*** (.042)

1.27*** (.041)

1.29*** (.042)

1.29*** (.042)

1.27*** (.042)


0.90*** (.016)

0.89*** (.016)


1.00 (.030)

0.96 (.030)


0.89 (.079)

0.92 (.082)


1.06*

(.029) 1.06

(.029)

Bankruptcy reform* income/asset means test (BR*MT2)

0.99 (.056)

1.02 (.055)


1.39** (.158)

1.38* (.163)

25

Notes: ***, ** and * indicate whether the coefficient is significantly different from one at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in parentheses. All equations include the control variables shown in the Appendix, plus month and state dummies. The equation shown in column (1) is the same as that shown in table 4.

Table 4:

Results of Cox Proportional Hazard Models Explaining Mortgage Default

Six Months Before to Six Months After Bankruptcy Reform

Prime Mortgages (1) (2) (3) (4) (5)


1.25** (.097)

1.25** (.096)

1.27** (.098)

1.25** (.097)

1.26** (.097)


0.95* (.028)

0.88*** (.028)


0.83*** (.028)

0.79*** (.028)


0.97 (.081)

0.99 (.084)


1.14**

(.053) 1.19***

(.052)


1.19*** (.053)

1.24*** (.052)


1.18 (.162)

1.11 (.170)

Subprime Mortgages

(1) (2) (3) (4) (5)


1.36*** (.051)

1.31*** (.049)

1.35*** (.051)

1.36*** (.051)

1.32*** (.050)


0.91*** (.013)

0.91*** (.013)


1.03 (.024)

1.01 (.025)


0.83** (.065)

0.79*** (.063)


1.06*

(.023) 1.07**

(.023)


1.06 (.048)

1.081 (.047)

Bankruptcy 1.28* 1.25*

26

reform*homestead exemption cap (BR*HC)

(.135) (.130)

Notes: : ***, ** and * indicate whether the coefficient is significantly different from one at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in parentheses. All equations include the control variables shown in the Appendix, plus month and state dummies.

Table 5:

Results of Placebo Tests

Using Fake Dates for Bankruptcy Reform


Prime

Mortgages

Subprime

Mortgages

Prime

Mortgages

Subprime

Mortgages

June 2005

February 2006


1.30** (.117)

1.26*** (.058)

0.55*** (.031)

0.71*** (.021)

Income-only means test (MT1) 0.69*** (.044)

0.88*** (.019)

0.96 (.040)

0.91*** (.017)

Income/asset means test (MT2) 0.83*** (.043)

0.97 (.073)

0.83*** (.037)

1.02 (.028)

Homestead exemption cap (HC) 0.97 (.0157)

0.84 (.336)

1.02 (.098)

0.85** (.060)


0.76** (.086)

0.91* (.037)

0.80** (.071)

0.99 (.031)


1.02 (.085)

1.10 (.164)

0.98 (.067)

1.12* (.050)


1.13 (.317)

1.13 (.785)

0.83 (.182)

0.72** (.100)

Notes: ***, ** and * indicate whether the coefficient is significantly different from one at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in parentheses. All equations include the control variables shown in the Appendix, plus month and state dummies.

27

Table 6:

Number of Additional Mortgage Defaults

Resulting from the 2005 Bankruptcy Reform

Bankruptcy Reform

Income-only Means Test

Income/Asset Means Test

Homestead Exemption Cap

Total mortgages originated in 2004-05

22,000,000 22,000,000 22,000,000 22,000,000

Prime mortgages:

Proportion of all mortgages originated in 2004-05

.81 .81 .81

Proportion affected by the change

1.00 .266 .314

Default rate/year .024 .024 .015

Increase in default rate after bankruptcy reform

.29 .33 .196

Subprime mortgages:

Proportion of all mortgages originated in 2004-05

.19 .19 .19

Proportion affected by the change

1.00 .435 .014

Default rate/year .147 .132 .153

Increase in default rate after bankruptcy reform

.27 .055 .378

Number of additional

mortgage defaults/year

288,000 52,000 16,000 3,000

Note: Mortgage default rates are converted from monthly to yearly using the conversion

factor ∑ =−

11

0)1(

t

td , where d is the monthly default rate.

28

Appendix:

Cox Proportional Hazard Models Explaining Mortgage Default:

Results for Control Variables


Prime Mortgages Subprime Mortgages

If FICO score 650 to 750 3.33 (.247)*** 1.75 (.216)*

If FICO score 550 to 650 11.5 (.884)*** 3.93 (.479)*

If FICO score 350 to 550 30.1 (2.93)*** 6.56 (.812)*

If FICO score is missing 1.10 (.060) 0.843 (.021)***

Debt payment-to-income ratio > 0.5 1.10 (.078) 1.13 (.045)**

Debt payment-to-income ratio (0.4 to 0.5) 1.22 (.063)*** 1.17 (.028)***

Loan-to-value ratio > 1.0 1.61 (.150)*** 4.94 (.839)***

Loan-to-value ratio (0.8 to 1.0) 1.87 (.078)*** 0.950 (.016)**

If full documentation 0.900 (.061) 1.019 (.067)

If partial documentation 1.12 (.092) 1.28 (.101)**

If documentation information missing 0.835 (.074)* 1.02 (.076)

If single-family house 1.04 (.043) 1.15 (.025)***

If fixed rate mortgage 0.788 (.032)*** 0.693 (.016)***

If jumbo loan 0.98 (.072) 1.12 (.037)***

If vacation home 1.09 (.087) 1.069 (.077)

If investment property 0.968 (.073) 0.953 (.035)

If occupancy type missing 1.28 (.061)*** 1.18 (.064)**

If loan was to re-finance 0.870 (.036) 0.832 (.014)***

If mortgage was securitized 1.18 (.060)*** 0.796 (.021)***

If loan was originated by the lender 0.682 (.044)*** 0.683 (.017)***

If loan was acquired wholesale, but not from a mortgage broker 0.0.882 (.061) 0.777 (.024)***

If loan was acquired from a correspondent lender 0.848 (.056)* 0.694 (.023)***

Homeowner’s gain from refinancing 0.309 (.085)*** 0.128 (.010)***

Lagged average mortgage default rate (zipcode) 1.091 (.029)*** 1.08 (.008)***

Lagged unemployment rate (MSA) 1.043 (.017)** 1.05 (.007)***

Lagged real income growth rate (state) 0.031 (.085)*** 0.157 (.038)***

State and month dummies? Y Y

Notes: Results for MT1, MT2, HC and the interaction terms are given in table 3, column (1). The sample period is from July 2005 through January 2006, excluding October 2005.

29

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Documents

Did Bankruptcy Reform Cause Mortgage Default to Rise? 1 · after bankruptcy reform. We also use difference-in-difference to examine the effects of three provisions of bankruptcy reform