Investigación

Artículo en revista académica

calendar_month Publicación: 27/01/2025

The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown

Mortgage cramdown has been proposed as a mechanism to avoid mortgage foreclosures in times of crisis. In this restructuring, the underwater portion of the mortgage is treated as unsecured debt and can be discharged during Chapter 13 bankruptcy. To quantify the ex-post effects of bankruptcy discharge in cramdown courts, we use a new data set of district courts that allowed mortgage cramdown over the period from 1989 to 1993. We take advantage of the random assignment of cases assigned to judges who significantly vary in their leniency. We find that a successful bankruptcy filing in cramdown courts reduces the five-year foreclosure rate by 29 percentage points and decreases the number of moves postbankruptcy. Although cramdown is beneficial for all demographic groups, we observe that cramdown particularly helps female filers, who are also less likely to receive a debt discharge during bankruptcy. Our results support that principal write-downs explain the vast majority of the reduction in foreclosure, and, thus, debt overhang considerations play an important role in explaining homeowners’ default.

Fuente: Review of Corporate Finance Studies