«DiscoVeriNg HomelessNess Volume 13, Number 1 • 2011 U.S. Department of Housing and Urban Development | Office of Policy Development and Research ...»
The docket sheet and court files allowed us to extract important dates that mark the chapter 13 bankruptcy procedure, including the filing date, the confirmation date, and the dismissal or discharge date as well as the filers’ financial and income information at the time of filing and the final outcome of their case. The court files included debtor petitions, attorney disclosure forms, statements of financial affairs, chapter 13 plans, and trustee reports. Each debtor’s petition contained schedules labeled A through J that explain his or her financial situation, which includes real property ownership; other personal assets in the form of furniture, cash, or insurance; liabilities such as secured debt and unsecured priority debt (taxes); and maintenance expenses.9 Using property addresses and owners’ names, we linked this bankruptcy data set with a foreclosure sale database that the Sheriff’s Office in New Castle County, Delaware, provided. The sheriff’s sale data set lists the sale date, plaintiff, defendant, attorney for the plaintiff, mailing address, and outcome of each foreclosure filing from July 2001 to October 2007. We added foreclosure sale price and the price and date of the last sale before foreclosure to this database, using information For further discussion of the treatment of homeowners in bankruptcy before 2005, see Bahchieva, Wachter, and Warren (2005); Berkowitz and Hynes (1999); Lin and White (2001); and White (1998).
The court files are mostly.pdf images from which information cannot be directly extracted using software. We manually collected all of our data by downloading these images and coding them into a database. The data were entered twice and the corresponding entries were crosschecked. The data were also checked against different sources in which the same information was reported. For instance, the summary of schedules provides headline numbers on filers’ assets, debts, income, and expenditures, and petition schedules A through J provide the same information in greater detail.
118 Refereed Papers The Homeownership Experience of Households in Bankruptcy provided by The Reinvestment Fund of Delaware (TRF). Knowing the last sale date before foreclosure enabled us to calculate owners’ tenure in their houses. We obtained the sales histories for properties that did not end up in foreclosure sale and for which TRF does not have price information from the New Castle County Recorder of Deeds.
Finally, we obtained local economic and housing market information by merging 2000 Census survey results with our data, using ZIP Codes to match the census data with properties. This information included percentage of people below the poverty line, median family income, median house value, and median monthly housing costs for mortgaged properties. According to the census, housing costs include mortgage payments, real estate taxes, insurance, and utilities and fuels.
Profiles of Bankrupt Households Between August 1, 2001, and August 1, 2002, 756 households filed for chapter 13 bankruptcy in New Castle County, which was about 70 percent of all chapter 13 bankruptcies filed in Delaware during that period. Of the 756 filers, 611 owned homes at the time of filing. We excluded filers who owned multiple properties from our sample, because many of these filers appeared to be speculators. We also deleted observations with incomplete information on filers’ basic income and balance sheets because of filer-reporting or court-recording errors, and we deleted observations with missing housing price information from TRF and the Recorder of Deeds. The final sample has 567 observations. Of the 567 filers, 291 successfully finished repayment plans and obtained discharge,10 11 converted to chapter 7 and obtained discharge via that method, and the rest were dismissed under chapter 13.
At the time of filing, bankruptcy filers in our sample had owned their houses for an average of 7.5 years. The median house tenure was 5 years, and about 7.5 percent of the filers had owned their houses for less than 1 year (see exhibit 1.c).11 We created a proxy for the number of months of mortgage delinquency by dividing the total mortgage arrears (including interest) by the reported monthly mortgage expenses, which often included tax payment. According to our calculation, more than 80 percent of the borrowers in our sample were delinquent on their mortgages at the time of filing, with an average length of delinquency of 10 months (see exhibit 1.b).12 Of filers, 27 percent were already in the foreclosure process, and 11 percent of those filers, or 3 percent of total filers, listed the county government as the plaintiff.
The plan completion rate for our final sample, at 51 percent, is much higher than the 44-percent discharge rate for the whole sample. See Eraslan, Li, and Sarte (2007).
For exhibits 1 and 4, the y-axis represents the probability density in percent, and the x-axes are described by their respective subtitles. For example, the x-axis of exhibit 1.a is house tenure in months, exhibit 1.b is months of mortgage delinquency, exhibit 1.c is mortgage loan-to-value ratio, and exhibit 1.d is the ratio of housing cost (defined in the text) and income. Similarly, the x-axis in exhibit 4.a is the number of months between bankruptcy filing and foreclosure sale, exhibit
4.b is the number of months between bankruptcy termination and foreclosure sale, exhibit 4.c is the ratio of sale price to house value, and exhibit 4.d is lenders’ loss rate.
Porter (2008) found that mortgage companies often impose unreasonable fees and charges on mortgage claims without borrowers’ knowledge. Thus, our calculation of months of mortgage default based on bankruptcy files may overstate the true length of mortgage delinquency.
1.5.5 0 1 2 3 0.5 1 1.5 2 2.5 In New Castle County, local governments can foreclose if the homeowner fails to pay taxes, incurs severely high sewer and water costs, or incurs other fees such as vacancy fees and mitigation costs.13 Redemption rights are denied to foreclosed homeowners except for tax lien foreclosures.
Mortgage borrowing at the point of filing approached or exceeded the value of most bankrupt homeowners’ homes. The average mortgage loan-to-value (LTV) ratio was 0.97, and close to one-half of the filers had mortgage debt equal to or in excess of the estimated value of their home at the time of filing (see exhibit 1.c). Even for those who had lived in their current houses for more than 10 years, the average mortgage LTV was 0.94, contrary to expectations.14 These data imply that high mortgage LTVs among bankrupt homeowners are not entirely attributable to high LTVs at the onset or brief tenure because exotic mortgage contracts, such as interest-only and reverse mortgages, have become popular only recently. These homeowners must have refinanced and increased the outstanding principal on their mortgages before they filed for bankruptcy. Most of the Some local governments sell their rights to lenders to collect on tax liens. Often, from the public records data, we cannot tell those sales apart from those tax lien foreclosures initiated by the government. Each bank or tax official has his or her own way of handling a tax lien auction or sale. In New Castle County, the county sheriff’s office handles all foreclosures.
When a homeowner purchases a house with a mortgage downpayment of 20 percent, in 10 years, he or she will accumulate home equity exceeding 20 percent of the house value, assuming that he or she makes his or her monthly mortgage payment and the house value does not depreciate substantially. In other words, the mortgage loan-to-value ratio will be lower than 80 percent.
filers’ debt was in mortgages: 71 percent for the mean filer and 74 percent for the median, which is comparable to the national average reported by the Federal Reserve’s 2001 Survey of Consumer Finances.
We calculated a debtor’s housing cost as a combination of four expenses: mortgage payment, property tax payment, insurance payment, and utility payment. Payments that were included in the utility expense were electricity, gas or oil, water, and sewer. To arrive at a measurement of housing affordability, we divided housing cost by households’ combined income. We plotted the distribution of this housing affordability measurement in exhibit 1.d. We deem a household to be living in unaffordable housing if it commits more than 50 percent of its income to housing costs.
According to our calculation, about 19 percent had unaffordable housing costs. These numbers are comparable to those reported in Eggum, Porter, and Twomey (2008). For the nation as a whole, 12 percent of homeowners have unaffordable housing costs. Finally, mortgage arrears accounted for about one-third of total debt in default, with total debt in default calculated as the sum of mortgage arrears and unsecured priority and nonpriority debt.
To identify subprime loans, we employed a commonly used methodology, using a 2001 U.S. Department of Housing and Urban Development (HUD) listing that classifies lenders as generally making either prime or subprime loans (see www.huduser.org/datasets/manu.html).15 According to this classification, subprime lenders originate or service about 15 percent of our mortgage loans. We further distinguished lenders as local or nonlocal by defining local lenders as those with headquarters in Delaware, Pennsylvania, or Washington, D.C. According to our classification, about
8.1 percent of the lenders are local.
Exhibit 2 summarizes information on borrowers’ mortgage debt. It also contains information related to borrowers’ demographics, income, assets, and liabilities. Compared with other Delaware residents, borrowers in our sample are less likely to be married, with only 43 percent of the sample being recorded as married versus 54 percent for overall Delaware households. The average household size is 2.75, which is larger than the state average of 2.54. Filers have stayed with their current job for an average of 5 years, but more than one-half have stayed with the current job for less than 1 year. Approximately 16 percent of the filers list alimony as part of either their monthly income or monthly expenses, suggesting a recent divorce.16 About 4 percent have experienced a recent unemployment spell.17 In addition, one-fourth of the filers have previous bankruptcy experience.
As expected, the level of these borrowers’ indebtedness is striking when compared with national statistics calculated from the 2001 Survey of Consumer Finances. Specifically, the bankrupt homeowners’ total debt has a median of $129,399, around nine times the national median indebtedness of homeowners, and their median total financial and nonfinancial assets are $114,901, about 84 The methodology, although imperfect, is used by the Federal Reserve and Harvard University’s Joint Center for Housing Studies, among others.
Because many divorces do not result in alimony, our measurement of recent divorce provides only a lower bound of actual divorces and is, therefore, subject to measurement error.
In Delaware, in 2001 and 2002, the unemployment rate was about 5 percent. One requirement of chapter 13 bankruptcy is that filers have a regular job for a meaningful repayment plan.
percent of the corresponding national median. Their median unsecured debt is $13,733, compared with a national median of $0 for homeowners.
Our filers, however, are very similar to those filers who are homeowners as identified in the 2001 Consumer Bankruptcy Project and reported in Lawless et al. (2008). For example, the median annual income in our sample is $32,304 compared with a median income of about $34,000 in Lawless et al.’s sample of chapter 13 filers who are mostly homeowners. The median home value at the time of filing in our sample is $100,800 compared with their national sample of $103,700. The median mortgage debt is $100,000 compared with their $91,600.
We estimated a lower bound for medical debts by flagging keywords such as “health,” “medical,” and “Labcorp” that are listed either as the debt type or the associated creditor. This lower bound estimate comes to $1,141 for the average filer and $2,915 for the average filer who reported positive medical debt. More than one-third of the borrowers reported positive medical debts, and nearly 8 percent of filers have medical debt at more than 10 percent of their total debt in default.
Most of the filers in our data had hired bankruptcy attorneys.
122 Refereed Papers The Homeownership Experience of Households in Bankruptcy Filers in our sample live in areas spanning 27 five-digit ZIP Codes. Economic conditions differ substantially across the regions. For example, average household annual income is $17,679 in the poorest neighborhood and $105,971 in the richest neighborhood. Similarly, the proportion of families living below the poverty line ranges from 0.9 to 24.1 percent. Median home values also vary substantially, from $71,100 to $415,200. Median housing costs for mortgaged properties range from $858 to $2,385 a month. As mentioned previously, housing costs include mortgage payment, property tax, insurance, and utilities. We calculated the ratio of the filer’s estimated home value and the local median home value. Similarly, we calculated filers’ income relative to the regional median. Finally, we calculate, for each ZIP Code, the ratio of median housing costs to median home value. All these measures are meant to capture local homebuying and mortgage-lending conditions, which determine how long it takes to auction a house and for how much it will sell.
The Homeownership Experience of Bankrupt Households We constructed three quantitative measures to capture the homeownership experience of bankruptcy filers. These are—
1. House tenure. For the purpose of this study, we defined house tenure as whether borrowers lost their current houses to foreclosure during the period of our observation. Few households sold their houses voluntarily within chapter 13 plans. We thus treated debtors who sold voluntarily the same as those who remained homeowners through the end of our sample period.
Note that our house tenure definition refers to parting with ownership of a particular property.
This parting need not be construed as a permanent return to the rental sector.