Abstract
This study analyzes whether bankruptcy asset exemptions and state foreclosure laws affect borrowers’ decisions to default on their mortgages and the lenders’ incentives to settle the default outside the foreclosure. Using a rigorously specified empirical model and accounting for endogenous loan terms, we find significant variation in the effects of both bankruptcy asset exemptions and mortgage foreclosure laws on mortgage defaults across different segments of the mortgage market. Certain provisions of foreclosure laws, such as judicial foreclosure, are associated with a higher level of mortgage defaults, and lenders operating in these states prefer to settle the defaulted loans out-of-foreclosure. We also find a statistically significant non-linear relationship between bankruptcy asset exemptions and mortgage defaults.
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