Bankruptcy exemptions, credit history, and the mortgage market

We develop and test a model of mortgage underwriting, with particular reference to the role of generic 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 has developed conflicting theories—and found conflicting results—seeking to explain how exemptions affect the mortgage market. By contrast, in our model exemptions are actually irrelevant to the mortgage underwriting decision. Instead, our model suggests that since exemptions are correlated with credit scores, some of the previous work's findings of significant effects for exemptions may rather reflect a failure to fully control for creditworthiness. Merging data from a major credit bureau with the Home Mortgage Disclosure Act (HMDA) data set, we confirm these predictions of our model.