Working Paper: CEPR ID: DP7204
Authors: Eric A. Posner; Luigi Zingales
Abstract: The housing crisis threatens to destroy hundreds of billions of dollars of value by causing homeowners with negative equity to walk away from their houses. A house in foreclosure is worth 30 to 50 percent less than a house that a homeowner either retains or sells on the market, and a foreclosed house damages neighboring property values as well. We advocate a reform of Chapter 13 that would allow homeowners to strip down the value of their mortgages in a prepackaged bankruptcy. Such a plan would give homeowners an incentive to keep or resell their homes, thus reducing the market value loss of homes while protecting the effective value of creditors? interests. Two further key elements of the plan are that it uses prices based on the average house price in a particular ZIP code, which reduces moral hazard; and it is automated, requiring only a rubber stamp by a bankruptcy judge or other official, thus preserving judicial resources. Other plans, including that of the Obama administration, are compared.
Keywords: bankruptcy; chapter 13; housing
JEL Codes: K35; R28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative equity (G32) | foreclosure rates (G21) |
| foreclosure rates (G21) | neighborhood property values (R20) |
| bankruptcy reform (K35) | homeowner behavior (R21) |
| homeowner behavior (R21) | foreclosure rates (G21) |
| price adjustments (L11) | moral hazard (G52) |
| bankruptcy reform (K35) | foreclosure rates (G21) |