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Seismic Effects of the Bankruptcy Reform (Did BAPCPA Burst the House Bubble & Boost Foreclosures?)

Seismic Effects of the Bankruptcy Reform (Did BAPCPA Burst the House Bubble & Boost Foreclosures?). Donald Morgan * and Benjamin Iverson § Bank Structure Conference, Federal Reserve Bank of Chicago May 8, 2009 * Research Officer (FRBNY), § Ph.D. Student (Harvard)

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Seismic Effects of the Bankruptcy Reform (Did BAPCPA Burst the House Bubble & Boost Foreclosures?)

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  1. Seismic Effects of the Bankruptcy Reform(Did BAPCPA Burst the House Bubble & Boost Foreclosures?) Donald Morgan* and Benjamin Iverson§ Bank Structure Conference, Federal Reserve Bank of Chicago May 8, 2009 *Research Officer (FRBNY), §Ph.D. Student (Harvard) Our views are not necessarily those of the Federal Reserve or Harvard.

  2. Why Subprime Foreclosures Rose? • Usual Suspects • Home price deflation • Excess credit supply/securitization • Rising interest rates

  3. New Suspect: BAPCPA(Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) • Reduces “supply” of bankruptcy protection • fees tripled • limits cram-down on auto loans • residency requirement limits access to exemptions • means test limits access to Ch. 7

  4. Why Suspect BAR? Pre-BAR, over-indebted mortgagors could free up cash-flow by filing bankruptcy and have credit card debt discharged and auto loan crammed down Reform blocks maneuver with means test etc., hence higher foreclosures or forced home sales

  5. Prima facie evidence? Subprime Foreclosures Surged & Home Prices Peaked with BAPCPA.

  6. Practitioner Testimony and Predictions “…many debtors file bankruptcy precisely so that they can paytheir mortgage… by discharging other debts.” Berkowitz and Hynes (1998) original emphasis. “ If … covered by your state’s homestead exemption, Ch. 7 may be the way to go…by getting rid of most your other debts, keeping up the mortgage will be just that much easier” Bankruptcy for Dummies (2006) “[P]eople get in over their heads by further encumbering their homes with equity lines of credit…Then, when interest rates rise, and home values stop increasing, they can no longer refinance and file a Chapter 7 bankruptcy petition to wipe out their [unsecured] debts and hold off foreclosure by their lender…[Now] they must file under Chapter 13, and pay off their debt in 60 months or less. Middle income families in this position could face the loss of their homes” Ms. Alexis McGee, President Foreclosure.com, Business Wire, April 25, 2005.

  7. Circumstantial Evidence: Before BAR, Past due mortgages/past due credit card loans improved when bankruptcy filings Increased

  8. Identifying Impact of BAPCPA on Foreclosures, etc. • Look across states and credit markets • Bigger impact in states with high bankruptcy demand, i.e, high exemption (X) states • X opposite of collateral; • Smaller impact in low X states

  9. Diff-in-Diff Predictions After BAPCPA, in high X (exemption) states • subprime foreclosures surge more, • prime foreclosures invariant • unsecured personal loan delinquency improve. • auto loans more secure & cheaper (due to reduced cramdown) • home prices fall more

  10. Data • State level • Multiple markets • Windows: • Pre-BAPCPA: 1998:1 – 2005:4 • Post-BAPCPA: 2006:1 – 2007:3 • Sources: see paper

  11. Diff-in-Diff Regression Yst = α + as+ αt + βBAPCPA∙X + `BAPCPA∙UNLIM_X …+ εst. Yst = foreclosure rate (subprime or prime) delinquency (personal loan or auto) home prices Controls = unemployment, log(income), income growth, home prices Complete regression results in paper.

  12. Subprime Foreclosures Rose More Since BAR in States with Higher, Finite, Exemptions.

  13. Selected Regression Coefficients (Table 3) - Impact: (2) → for median X state, foreclosure rate 12.6 % higher than average before → 32k more foreclosures per quarter - St. dev in HOME APP → 48k “ “

  14. Auto Loan Interest Spreads Fell After BAR, Especially in Unlimited Exemption States.

  15. Higher House Prices & Steeper Declines Post-BAR in Higher X States (new, tentative result)

  16. Seismic Effects of BAPCPA: Summary • Shifted risk • unsecured (credit card) & under-secured (upside down auto loans) safer • secured riskier • Impact • subprime foreclosures surged • home prices peaked • cheaper auto credit • Was BAPCPA the needle that burst the buggle and boosted foreclosures?

  17. Reference Slides

  18. Ch. 7 v. Ch. 13 Ch. 7 Þ liquidate nonexempt home equity; remaining unsecured debts discharged; keep future income Ch. 13 Þreschedule/keep all assets so long as maintain payments Sweet spot for over-indebted mortgagor with positive equity: Ch. 7 in high exemption state

  19. Did BAR Make Auto Credit Cheaper and Safer? (selected diff-in-diff regression coefficients-Table 4)

  20. Home Prices Peaked with BAR

  21. Housing Bust Coincides with BAPCPA

  22. Higher Rush Before BAPCPA in Higher Exemption States Ashcraft, Dick, Morgan (2007)

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