"Bankruptcy Reform, Mortgage Default and the Financial Crisis"
Institution(s): Hong Kong Institute of Economics and Business Strategy, The Hong Kong Centre for Economic Research, Faculty of Business and Economics
Date: Sep 07, 2011 (Wednesday)
Time: 12:00 noon - 02:00 pm
Venue: Conrad Hotel, 88 Queensway, Admiralty, Hong Kong
Cost: HK$800 per person
Enquiries: Ms. Angelina Hung (Tel: 2547 8472; firstname.lastname@example.org)
The U.S. bankruptcy reform of 2005 played an important role in the 2008 financial crisis and the subsequent recession. When debtors file for bankruptcy, credit card debt and other types of debt are discharged--thus loosening debtors's 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 can be discharged in bankruptcy. An unintended consequence of the reform was to raise mortgage default rates. The paper calculates that bankruptcy reform caused prime and subprime mortgage default rates to rise by 23% and 14%, respectively. This meant that the overall mortgage default rate rose by one percentage point even before the start of the financial crisis, suggesting that the reform greatly increased the severity of the crisis.
Michelle J. White is Professor of Economics at the University of California, San Diego, Research Associate at NBER, and Visiting Professor at CK Graduate School of Business in Beijing. She received her Ph.D. in economics from Princeton University and has held faculty positions at the University of Pennsylvania, New York University, and the University of Michigan. During the past several years, her research has focused on the personal bankruptcy system in the U.S. and the effects of the U.S. bankruptcy reform adopted in 2005. Other recent research projects include the interaction between bankruptcy and mortgage default, the effect of Proposition 13 in California on household mobility, and the effects of local sales taxes on employment in retailing versus manufacturing.
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