Bankruptcy and the market for mortgage and home improvement loans

This paper investigates the relationship between bankruptcy exemptions and the availability of credit for mortgage and home improvement Loans. We deve lop a combined model of debtors' decisions to file for bankruptcy and to de fault on their mortgages and show that the theory predicts positive relatio nships between both the homestead and personal property exemption levels an d the probability of burrowers being denied mortgage and unsecured loans. W e test these predictions empirically and find strong and statistically sign ificant support when evidence from cross-state variation in bankruptcy exem ption levels is used. Applicants for mortgages are 2 percentage points more likely to be turned down for mortgages and 5 percentage points more likely to be turned down for home improvement loans if they live in states with u nlimited rather than low homestead exemptions. These relationships also hol d when we introduce state fixed effects into the model. (C) 2001 Academic P ress.