This paper examines the determinants of missed payments and foreclosure initiation among a national sample of homeowners who filed for personal bankruptcy in 2007, using a rich dataset from the 2007 Consumer Bankruptcy Project.
Credit access had a significant effect on keeping mortgages current across all of the authors’ models: access to, and reliance on, credit cards reduced the chance of missed payments and default, increasing the likelihood that bankruptcy could produce a fresh start. Missed mortgage payments also were associated with a substantial drop in income and with the use of a mortgage broker. The probability of foreclosure initiation was lower in states with longer foreclosure timelines.
Finally, the authors discuss the implications of our findings for consumer credit regulation, bankruptcy reform, and an integrated view of federal bankruptcy law and state foreclosure law
As this article relies on data from the 2007 Consumer Bankruptcy Project, it is possible and even likely that following the mortgage crisis and current ecomonic woes, that the bankruptcy landscape has substantially changed.
That notwithstanding, the authors point to several interesting factors that affected whether a homeowner had missed payments, including:
• Credit access: Homeowners who had access credit card debt to manage financial distress were less than half as likely to have missed a mortgage payment and half as likely again to become severely delinquent. At the same time, those who were recently unable to refinance their homes or who had taken out a car-title or payday loan were more than twice as likely to have missed a mortgage payment than other filers.
• Income problems: Homeowners who reported that their household income "decreased significantly" in the two years prior to filing bankruptcy were nearly twice as likely to miss a mortgage payment in that period as other respondents. Being self-employed was the strongest of severe delinquency among this group. Self-employed debtors were more than two and a half times as likely to go into severe delinquency as other debtors.
• Mortgage broker: If a homeowner had used a mortgage broker to purchase the home, the likelihood of having missed at least one mortgage payment by increased by 64%. While not suggested in the parper, this points to a need for requiring mortgage brokers to have some "skin in the game," because otherwise they have tremendous incentives to push potential homeowners into unaffordable mortgages. This problem has, to a great extent, dried up as mortgage originators have started requiring income documentation and unbiased appraisals.• College degree: Having a bachelor’s degree made a borrower who missed a payment half as likely to become severely delinquent compared to those who went to college but did not earn a bachelor’s degree.
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