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Map of mortgage defaults 20087/8/2023 ![]() ![]() The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act yields large welfare gains (1% consumption equivalent variation) but results in increases in both foreclosure and bankruptcy rates. I use the model to evaluate how proposed and implemented changes to bankruptcy policy affect default rates and welfare. The model also predicts recourse results in higher bankruptcy rates and a higher coincidence of foreclosure and bankruptcy. Households in states with high exemptions therefore hold less unsecured and more mortgage debt compared to low exemption states, which leads to lower bankruptcy rates but higher foreclosure rates. ![]() I find that more generous homestead exemptions raise the cost of unsecured borrowing. The model can account for 83% of the variation in bankruptcy rates due to differences in bankruptcy and foreclosure law. The model is calibrated to match national foreclosure and bankruptcy rates and aggregate statistics related to household net worth and debt. Households can default separately on both types of debt. I construct a general equilibrium model where heterogeneous infinitely-lived households have access to unsecured borrowing and can finance housing purchases with mortgages. I investigate to what extent differences in foreclosure and bankruptcy laws can jointly explain variation in default rates across states. ![]() Foreclosure laws regulate default on secured mortgage debt. Bankruptcy laws govern consumer default on unsecured credit. ![]()
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