Bankruptcy

Homeowners in Bankruptcy

By Adam Levitin

Katie Porter makes some excellent observations about the Carroll and Li study of homeowners in bankruptcy. There's another crucial point to add: the study's conclusions only tell us, at best, about bankruptcy today. It shouldn't be much of a surprise that bankruptcy doesn't have a huge impact on homeownership retention precisely because it is impossible to modify single-family principal residence mortgages in bankruptcy. The study is looking at a bankruptcy system with both hands tied behind its back. Given that bankruptcy already results in a 15% higher level of homeownership retention than foreclosure, one would expect a much greater impact if debtors could adjust their mortgages to make them affordable.

Consider--Credit Suisse has found that voluntary loan modifications that reduce monthly payments have an 83% success rate in the current market. Involuntary modifications could be even more significant than voluntary modifications. If bankruptcy modification were allowed and we saw a similar success rate in homeownership retention, that would be a big accomplishment indeed.

Thus, I think a fairer interpretation of the study's findings are that currently bankruptcy helps a bit with homeownership retention, even though it is working with the very modest tool set of the stay and a chance to de-accelerate and cure, and that with a broader tool set to modify mortgages, bankruptcy could make a big difference in homeownership retention.

Full post as published by Credit Slips on October 02, 2008 (boomark / email).