Transcript Donald Morgan* and Benjamin Iverson§ Bank Structure Conference, Federal Reserve Bank of Chicago May 8, 2009 *Research Officer (FRBNY), §Ph.D.

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.

Usual Suspects
◦ Home price deflation
◦ Excess credit supply/securitization
◦ Rising
interest rates

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
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
10
10
Case-Schiller HP Index
8
8
6
6
BAPCPA
Moody’s HP Index
4
4
foreclosure rate
2
2
0
1998q1
0
1999q1
2000q1
2001q1
2002q1
2003q1
2004q1
2005q1
2006q1
2007q1
Source: Federal Home Finance Agency, MBA National Deliquency Survey; Moody's Economy.com national median home price index, Fiserv, S&P,
MacroMarkets LLC, and Haver Analytics. Solid line shows percent of outstanding subprime mortgages that are in foreclosure in U.S. Dashed line shows
percent of outstanding total mortgages that are in foreclosure in U.S. Connected line with circles shows U.S. median home price index (1998q1 = 4.0).
“…many debtors file bankruptcy precisely so that they can pay their
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.
1991q1
1995q1
total filings
1999q1
qdate
2003q1
2007q1
late mortgages %/late credit card %
.3
0
400000
600000
.4
.5
.6
.7
late mortgages %/late credit card %
200000
total filings
.8
800000

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
After BAPCPA, in high X (exemption) states
1.
subprime foreclosures surge more,
2.
prime foreclosures invariant
3.
unsecured personal loan delinquency improve.
4.
5.
auto loans more secure & cheaper (due to
reduced cramdown)
home prices fall more

State level

Multiple markets

Windows:
◦ Pre-BAPCPA: 1998:1 – 2005:4
◦ Post-BAPCPA: 2006:1 – 2007:3

Sources: see paper
Yst = α + as + α t + 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.
300
CA
NV
200
MA
100
NH
MN
0
HI
MEAK
CT
MI
CO
WI
NY VT
VA
NJ
ND
IL
MO
WY
MD
GA
INLA
OH
AL
KY
TN
PA
DE MS
MT
NCORWA
SC
NMID
WV
UT
FL
AZ
SD
DC
IA
TX
KS
OK
AR
-100
(Pre BAR - Post BAR)
RI
NE
0
100
200
300
400
Single homestead exemption ($000s)
500
Sources: State Laws & Statutes, Mortgage Bankers Association
Difference in subprime foreclosure rate equals percent change in average rate from
seven quarters before BAR (2004:2-2005:4) to seven quarters after (2006:1-2007:3)
... Unlim.
BAPCPA ∙ X
Dependent Variable:
Mortgage Foreclosure Rate:
Personal Loan
Subprime
Prime
Delinquency Rate
(2)
2.85*** 2.04***
0.07
-0.06
-0.78*** -0.84***
BAPCPA∙ UNLIM X 0.81
HOME APP.
UNEMP.
0.68
0.04
0.02
-0.12
-0.16
-0.11***
-0.01***
0.01
0.53*
0.12***
0.14**
- 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 “
“
4
BAR
4.5
40
3.5
20
2.5
3
0
2
-20
-40
1999m7
2001m7
2003m7
Unlimited spread
Unlimited - limited gap
2005m7
Limited spread
2007m7
Dependent Variable:
BAPCPA*X
BAPCPA*Unlim. X
% of subprime loans in foreclosure
Unemployment rate
Log(per capita income)
Per capita income annual growth
House
House Price
Price Level Appreciation
36.66**
-3.30**
-3.04
-1.66
-6.09***
-0.65***
-5.95
-2.01***
117.08
-1.48
-0.36
0.07

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?
Ch. 7 liquidate nonexempt home equity;
remaining unsecured debts discharged;
keep future income
Ch. 13  reschedule/keep all assets so long as
maintain payments
Sweet spot for over-indebted mortgagor with
positive equity: Ch. 7 in high exemption state
(selected diff-in-diff regression coefficients-Table 4)
BAR ∙ X
BAR∙ UNLIM X
Delinquency Rate on
Auto Loan Spread Direct Auto Loans Indirect Auto loans
-0.09
-0.14
-0.25
-0.34
-0.17
-0.09
-0.11
-0.15*
-0.62** -0.67**
-0.20
-0.13
Unscaled Exemptions
BAR∙X
BAR∙UNLIM X
-0.05*
-0.06**
-0.02
-0.04
-0.02
0.01
-0.12
-0.15*
-0.57*
-0.62**
-0.18
-0.11
10
8
BAR
(10/2005)
Case-Shiller home price index
6
10
8
6
Median home price index
4
4
FHFA home price index
2
2
0
0
1998q1
1999q1
2000q1
2001q1
2002q1
2003q1
2004q1
2005q1
Source:
Federal Home
Finance Agency,
MBA National
Deliquency
Survey; Moody's
Economy.com
national median
home price2006q1
index, Fiserv, 2007q1
S&P,
MacroMarkets LLC, and Haver Analytics. Solid line shows percent of outstanding subprime mortgages that are in foreclosure in U.S. Dashed line shows percent of
outstanding total mortgages that are in foreclosure in U.S. Connected line with circles shows U.S. median home price index (1998q1 = 4.0). Connected line with
triangles shows Case-Shiller home price index (Seasonally Adjusted, 1998q1 = 4.0). Connected line with triangles shows Case-Shiller home price index (Seasonally
600,000
2,000
1,800
500,000
1,600
1,200
BAPCPA)
300,000
1,000
Residential Permits
800
Housing Starts
600
Housing Completions
400
200,000
100,000
200
Home Sales (right axis)
0
1998q1
0
1999q1
2000q1
2001q1
2002q1
2003q1
2004q1
2005q1
2006q1
2007q1
Source: Moody's Economy.com
Number of residential permits, housing starts, and housing completions per quarter in the U.S. are reported on left axis. Total existing
Sales (000s)
Permits, Starts, Completions
1,400
400,000
One-Quarter Percent Change in Chapter 7 Filings
2005Q4 over 2005Q3
80
100
DC
60
VT
LA
NV
DE
MD
20
40
MA
NJ
PA
IL
IN
OH
NY MI
CAAK
MO
AL WY
CO
VA
WA
KY
AR
WV
NEOR HI
MT
GA
SCNC UT ID
NM
WI
ME
NH
TN
MS
CT
RI
ND
MN
0
AZ
0
100
200
300
Homestead exemption ($000s)
400
500
Ashcraft, Dick, Morgan (2007)