Bankruptcy exemptions and the market for mortgage loans

The recent explosion in personal bankruptcy filings has motivated research into whether credit markets are being adversely affected by generous legal provisions. Empirically, this question is examined by comparing credit conditions and bankruptcy exemptions across states. We note that the literature has focused on aggregate household credit, making no distinction between secured and unsecured credit. We argue that such aggregation obscures important differences in forms of credit. Most significant, property exemptions do not prevent the home mortgage creditor from foreclosing on the home if not fully repaid. This makes it unlikely that the home mortgage lender will be adversely affected by the exemptions. We argue further that some property exemptions, in fact, may have some beneficial effects for home mortgage lenders. Using both household-level data and state-level data, we show that in the 1990s high exemption levels have not tended to increase mortgage rates or increase the probability of being denied a mortgage.