Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates

Joshua Goodman
Harvard University – Harvard Kennedy School (HKS)

Adam J. Levitin
Georgetown University Law Center

August 2012

HKS Working Paper No. RWP12-037
Georgetown Law and Economics Research Paper No. 2128841

Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates

Abstract:

Recent proposals to address housing market troubles through principal modification raise the possibility that such policies could increase the cost of credit in the mortgage market. We explore this using historical variation in federal judicial rulings regarding whether Chapter 13 bankruptcy filers could reduce the principal owed on a home loan to the home’s market value. The practice, known as cramdown, was definitively prohibited by the Supreme Court in 1993. We find evidence that home loans closed during the time when cramdown was allowed had interest rates 10-20 basis points higher than loans closed in the same state when cramdown was not allowed, which translates to a roughly 1-2 percent increase in monthly payments. Consistent with the theory that lenders are pricing in the risk of principal modification, interest rate increases are higher for the riskiest borrowers and zero for the least risky, as well as higher in states where Chapter 13 filing is more common.

Full paper below…

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Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates

Comments
One Response to “Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates”
  1. Sarah says:

    A weaker argument refuted by good work. There are other reasons the “opposition” doesn’t want cramdown, but they’ll rarely “show their hand. “

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