1. 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. Usual Suspects Home price deflation Excess credit supply/securitization R ising interest rates

3. 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. 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

6. …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 states 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.

8. 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. After BAPCPA, in high X (exemption) states 1. subprime foreclosures surge more, 2. prime foreclosures invariant 3. unsecured personal loan delinquency improve. 4. auto loans more secure & cheaper (due to reduced cramdown) 5. home prices fall more

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

11. Y st = α + a s + α t + βBAPCPAX + `BAPCPAUNLIM_X …+ ε st. Y st = 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.

13. Dependent Variable: Mortgage Foreclosure Rate:Personal Loan SubprimePrime Delinquency Rate (2) BAPCPA X 2.85***2.04***0.07-0.06 -0.78***-0.84*** BAPCPA UNLIM X 0.810.680.040.02-0.12-0.16 HOME APP. -0.11***-0.01***0.01 UNEMP. 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

15. Dependent Variable: House Price Level House Price Appreciation BAPCPA*X36.66**-3.30** BAPCPA*Unlim. X-3.04-1.66 % of subprime loans in foreclosure-6.09***-0.65*** Unemployment rate-5.95-2.01*** Log(per capita income)117.08-1.48 Per capita income annual growth-0.360.07

16. 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?

18. 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

19. Delinquency Rate on Auto Loan SpreadDirect Auto LoansIndirect Auto loans BAR X -0.09-0.14-0.25-0.34-0.17-0.09 BAR UNLIM X -0.11-0.15*-0.62**-0.67**-0.20-0.13 Unscaled Exemptions BARX -0.05*-0.06**-0.02-0.04-0.020.01 BARUNLIM X -0.12-0.15*-0.57*-0.62**-0.18-0.11 (selected diff-in-diff regression coefficients-Table 4)

22. Ashcraft, Dick, Morgan (2007)