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

Jacelly C. Cespedes, Carlos R. Parra, Clemens Sialm

NBER Working Paper No. 28900
Issued in June 2021
NBER Program(s):Asset Pricing, Corporate Finance, Public Economics

Mortgage cramdown enabled bankruptcy judges to discharge the underwater portion of a mortgage during Chapter 13 bankruptcy before the Supreme Court disallowed this practice in 1993. We exploit the random assignment of cases to judges to quantify the ex-post effects of Chapter 13 bankruptcy over the period from 1989 to 1993. We find that a successful Chapter 13 filing in a cramdown court substantially decreases the five-year foreclosure rate, the propensity to move, and the crime rate. Our results suggest that principal write-down considerably reduces homeowner’s distress.

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Document Object Identifier (DOI): 10.3386/w28900

  
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