Mortgage Foreclosure and Consumer Bankruptcy

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Erie
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Nancy Wallace, University of California-Berkeley

The Effect of Mortgage Securitization on Foreclosure and Modification

Samuel Kruger
,
University of Texas-Austin

Abstract

Did securitization exacerbate the foreclosure crisis by altering mortgage servicing practices? I exploit the unanticipated freeze of private mortgage securitization in 2007 to provide new evidence that securitization increases foreclosure probability and decreases modification probability. Second, I show that these effects persisted over time even after implementation of the Home Affordable Modification Program (HAMP) in 2009. Finally, I use hand-collected data on the contractual terms of servicing agreements to show that servicers typically have broad discretion to modify loans but face significant incentives favoring foreclosure. The evidence implies that securitization significantly increased foreclosure rates during and after the crisis.

From Delinquency to Foreclosure: A Model of Loan Workouts

Daniel Lebret
,
Cornell University
Daniel Quan
,
Cornell University

Abstract

In this contribution, we investigate whether there is a place for a reorganization process in the presence of costly financial distress and foreclosure for commercial real estate portfolio loans. Assuming rational behavior of borrowers and lenders, we propose a model of mortgage default with stochastic property value appreciation extended to reconcile the fact that commercial real estate properties in real life have many ways of dealing with financial distress rather than resorting to foreclosure immediately upon delinquency. We do this by deriving closed form formulas for a single name structural model of delinquency and foreclosure under a generalization of both the first passage approach and the excursion approach and by adapting our work to the problematic observed in commercial real estate.

Walmart and Urban Land Prices: Friend or Foe?

Barrett Slade
,
Brigham Young University

Abstract

Using a spatial difference-in-differences research design, this paper examined the effect of a new Walmart store on nearby U.S. urban land prices and found that, within one-quarter mile of a new Walmart store locale, land prices increased by almost 39% over the four-year development time period (from site negotiation to the store opening) compared with land located from one to three miles from the new store site. The analysis found that land prices increased almost geometrically over the development period as information leakage implied that a new store would actually be built and that demand for nearby land would increase. Examining the open date, rather than the development period, this investigation also found that land prices within one-quarter mile of the new store locale increased approximately 26% within three years after the open date compared with land located from one to three miles and that sold within three years before the store open date. The analysis also found that commercial land sales, compared with residential land sales, were instrumental in driving the price effect.

How Does Consumer Bankruptcy Protection Impact Household Outcomes?

Carlos Parra
,
University of Texas-Austin

Abstract

Chapter 7 bankruptcy protection provides more than $100 billion in debt relief each year, yet its impact on consumers remains unclear. Using unique hand-collected data from individual bankruptcy petitions, I employ a regression discontinuity design to estimate the effect of Chapter 7 on subsequent household investment behavior and financial performance. I find that Chapter 7 protection increases the probability of the filer (i) creating a new business, (ii) obtaining secured lending, (iii) becoming a homeowner, and (iv) avoiding home foreclosure. Additional tests suggest that although Chapter 7 protects individuals in a variety of ways, the above findings arise because of debt relief.
Discussant(s)
Jiakai Chen
,
University of Hawaii
Carles Vergara-Alert
,
University of Navarra
Jessie Handbury
,
University of Pennsylvania
Nirupama Kulkarni
,
Reserve Bank of India
JEL Classifications
  • G3 - Corporate Finance and Governance
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location