Title: Bankruptcy exemptions, credit history, and the mortgage market
Description: "We develop and test a model of mortgage  underwriting, with particular reference to the role of credit bureau scores.  In  our model scores are used in a standardized fashion, which reflects the  prevalence of automated underwriting in industry practice.  We show that our  model has implications for the debate on the effect of personal bankruptcy  exemptions on secured lending.  Recent literature (Berkowitz and Hynes (1999),  Lin and White (2001)) has developed conflicting theories&#151;and found  conflicting results&#151;seeking to explain how exemptions affect the mortgage  market.  By contrast, our model implies that  when lenders use credit scores in a standardized manner, exemptions should be  irrelevant to the mortgage underwriting decision.  Merging data from a major  credit bureau with the Home Mortgage Disclosure Act (HMDA) dataset, we confirm  this prediction of our model.  We also show that while ignoring borrower credit  quality may make exemptions appear to be significant, once one controls for  credit scores then exemptions have no effect on the likelihood that a mortgage  application is approved.  We confirm this empirically and argue that this may  help explain some of the results of the previous literature"--Federal Reserve Bank of Philadelphia web site.
Subjects: Bankruptcy, Credit scoring systems, Mortgage loans