Debt Portfolios and Homestead Exemptions

Abstract

This paper investigates the economic relevance of the large differences in homestead exemptions across US states. We build a structural model for an equilibrium analysis of debt-portfolio choices over the life cycle. Our analysis captures key patterns from the observed cross-sectional distributions of secured debt, unsecured debt, and of home equity. The model predicts that harmonizing the amount of home equity exempt in bankruptcy procedures has quantitatively negligible effects on the interest rate of unsecured debt and on welfare, unless the exemption is eliminated. The small welfare effect may rationalize why the differences in homestead exemptions are so persistent. (JEL D14, D91, E21, G11, H71, R31)

Household debt and crises of confidence

“…We focus on owner‐occupied housing as the determinant of household borrowing opportunities since data of the Survey of Consumer Finances in the 2000s reveal that the median working‐age household in the U.S. owns a home and borrows against its collateral value. Mortgage debt of working‐age households accounts for more than of their debt ( Hintermaier and Koeniger ()). The specification of the collateral constraint ( ) in our model captures existing financial regulation and lending practices, which limit the extent of debt‐financing by the valuation of collateral.…”

Household Debt and Crises of Confidence

“…Mortgage debt of working-age households accounts for more than 90% of their debt (Hintermaier and Koeniger, 2011). The specification of the collateral constraint (3) in our model captures existing financial regulation and lending practices, which limit the extent of debt-financing by the valuation of collateral.…”

“…The steps exploit the equilibrium conditions stated by equations (19), (20), (21), (22), (23), and (24). Irrespective of the type of equilibrium, we base the construction of equilibrium combinations of variables on a successor-state A T 1 , in a first stage determine the set of all equilibrium belief-weightings of outcomes supported by A T 1 , and in a second stage construct equilibrium combinations of the remaining variables.…”

The (Un-) importance of Chapter 7 wealth exemption levels

“…They find that the welfare differences between the systems depend on the persistence and variance of the shocks. Pavan (2008) and Hintermaier and Koeniger (2011) extend the standard one-good model by including both durable and non-durable goods in the model. Hintermaier and Koeniger (2011), in contrast to Pavan (2008) but consistent with my model, find that the exemption level does not matter much for the default rate.…”