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BS Bankruptcy Numbers

posted by Adam Levitin

We've already seen a lot of bs numbers in the cramdown debate. The Mortgage Bankers Association keeps pushing its ridiculous figures. And now Todd Zywicki has joined the fray with an op-ed in the Wall Street Journal a couple of weeks ago.

Professor Zywicki that claimed that "A recent staff report by the Federal Reserve Bank of New York estimated a 265 basis-point reduction on average in auto loan terms as a result of the reform."

One little problem. That's not what the Fed staff report found. Professor Zywicki was off by 250 basis points (a doozy of a mistake!), as well inserting a causal link not supported (and arguably contradicted) by the Fed staff's study. The study states that "The decline in the average auto loan spread was 15 basis points lower after BAR for unlimited exemption states, a 5.7 percent decline relative to the mean over all states (265 basis points)." In other words, the average rate spread is 265 bp. The decline in rates, to which Zywicki was referring was only 15bp, and that was only in states with an unlimited homestead exemption.  That it was not 265 bp was abundantly clear from the regression tables.

But that's not all. It's not as if Professor Zywicki simply mistook a 15 bp drop for a 265 bp drop.  That 15 bp isn't what it appears to be.  The study used two statistical specifications and looked at states with limited and states with unlimited homestead exemption to see what impact there was on auto loan rates post-BAPCPA, which enacted an anti-auto cramdown provision (the infamous "hanging paragraph" that says that there's no bifurcation of claims for cars purchased primarily for personal use in the previous 910 days).

In one specification it found nothing with statistical significance regardless of the homestead exemption level, which means that it couldn't rule out the possibility that the change in rates was random.

In the other specification, post-BAPCPA there was a marginally statistically significant 15 bp drop in five-year auto loan rates in states with unlimited homestead exemptions. There was no statistical significance in the drop in other states. What's funny about this is that homestead exemptions have no bearing in Chapter 13--exemptions are only available in Chapter 7. So if the study had aggregated all states for its regression, it seems unlikely that it would have gotten stronger statistical significance.

So we have at best very weak evidence of a 15bp drop in rates. But it doesn't follow that the drop was due to the anti-auto-cramdown provision. The study also found a significant decline in auto-loan delinquencies in the short period after BAPCPA. The most plausible story, I think, is that surge in bankruptcy filings before BAPCPA's effective date cleared out the pipeline of troubled loans so that post-BAPCPA auto loan default rates were lower. My guess is that they've climbed right back up.  Notice that this has nothing to do with cramdown. This has to do with moving forward some filings that would have happened later. So we have a 15bp drop that might not even be statistically significant and only in some specifications and only for states with unlimited homestead exemptions, and it probably isn't attributable (or at least most of it) to the anti-cramdown provision, but instead to BAPCPA causing a filing pile-up. So where did Professor Zywicki get this 265 basis point number from? That's the spread that exists between five year auto loans and five year Treasuries. It has nothing to do with bankruptcy.

Sometimes a little common sense is needed when looking at numbers, too. In December 2005, auto loan rates were at around 6.63% (663 bp). If 265 bp was right, it would have been a 40% decrease in auto loan rates! Whatever impact bankruptcy has on credit costs, I don't think there's anyone who could honestly argue that 40% of the cost of auto loans is due to the ability to cram down loans on cars purchased primarily for personal use within the previous 910-days with a purchase money security interest. There just aren't that many folks filing for Chapter 13 bankruptcy, much less who fit into this particular set of circumstances, to have this kind of impact on pricing, regardless of the loss severities.

Yet another case of baloney numbers shaping the bankruptcy debate. I hope the WSJ runs a correction on this.  Now there's some fact-checking for you. 

[Update 3.6.09: Based on correspondence with Don Morgan, one of the NY Fed study's authors and Professor Zywicki, a few new points emerge:

First, I misread the study too.  The 15bp finding is in a regression that measure the "difference-in-differences" in the spread between auto loans and Treasuries pre- and post-BAPCPA for states with and without unlimited homestead exemptions.  The study does not report the post-BAPCPA rate drop in auto loan rates.  The author, however, tells me that it turns out to be 46-56 bps, and to have strong statistical significance. So let the record stand corrected on this.  

Second, regardless of whether the number is 15, 46, 56, or 265bps, the finding of a correlation does not mean there's causation.  But that's precisely what Professor Zywicki was pushing in the WSJ.   Unfortunately, it's just not a tenable claim.  

It's possible that BAPCPA resulted in lower auto loan rates.  But in order to make a reasonable causation argument, one must first explain the similar or larger rate drops in 2000-2001 and in 2003 and in 2007 that have nothing to do with BAPCPA.  Otherwise, the causal argument is reduced to the fallacious post hoc ergo propter hoc variety.  

The chart below, taken from the NY Fed study shows with the solid and dotted lines the spread between auto loan rates and Treasury's for states with and states without unlimited homestead exemptions.  They move in sync, and they clearly fall after BAPCPA.  But they also fall equally sharply before and after BAPCPA.  Auto loan rate spreads over Treasury jump around a lot, and the mere fact that they fell after BAPCPA doesn't prove anything.    

(fwiw, Chart 5 appears to be incorrectly labelled in the study.  The study says that the "Left axis measures interest rate on new automobile loan (5 year) minus rate on government bond (5 year)."  If so, then 15bps would appear to be roughly the right measure.  Instead, the rate spread must be the right axis in bps, and the left axis must be measuring the difference in the auto-loan-treasury spread between limited and unlimited homestead exemption states.)  

The problems with Professor Zywicki's causality argument don't end there.  Any causality argument must also distinguish between general impacts of BAPCPA (e.g, delinquency pipeline cleared out) and the auto-cramdown provision.  This type of event study cannot provide support for that.  The rate drop could be due to the hanging paragraph, but there's no responsible way to make that claim without addressing these other factors, and the NY Fed study doesn't attempt to do that. The fact that Professor Zywicki was off by 209-219 bps, rather than by a full 250 bps (something he couldn't have known from the study) doesn't absolve him of making an untenable causal claim. 

The  bankruptcy policy debate should happen on the basis of the best possible evidence.  If more restrictive bankruptcy laws result in cheaper credit, that's a very important policy consideration, and for the integrity of the policy debate, we need to be working off the best numbers available. I've updated this post to make sure that the correct numbers are clear.  I'm still hopeful that Professor Zywicki will make clear that he doesn't stand by either his 265 bp claim or his untenable claim of causality.]

[Updated 3.7.09

Professor Zywicki has corrected on the 265 bp claim.  He still seems to be making causal assertions, however, such as that the study finds "the impact of eliminating cramdown was a reduction in interest rates of 56 or 46 basis points."  That's not quite right.  The study can't test the elimination of cramdown; it can only test the impact of BAPCPA as a whole.  In fairness, Zywicki later refers to the study finding the impact of BAPCPA, rather than the specific cramdown provision.  Regardless, Professor Zywicki still has no response to all of the equally large jumps up and down in the auto loan rate to Treasuries before and after BAPCPA, which casts serious doubt on any causal story.]


Seems as though the Mortgage and Servicing Lobby can purchase these numbers at whim. MAKES NO SENSE! What does Craming down mortgage values have to do with higher interest rates if we CANNOT do it for Mortgages made post-enactment? Are there any lobbyist or their "supporters" ie. our elect, Rush Blimpball, Rush Blimpball wannabes,out there that can answer that for me?

Professor Zywicki bankruptcy views are, if nothing else, consistent.

I think we need to listen to whatever he says carefully, because he is one of the best sources of information on what should be done - and not done - with the Bankruptcy Code. Not as a Title 11 Nostradamus, but as an extremely reliable contrary indicator.

Let me know when he issues his retraction on the auto loan claim.

***Cricket sounds***

Can someone tell me how the "hanging paragraph" is helping Auto lenders now? I have seen a stream of Car salesmen, servicing managers, and car lending managers in office. So as far as Bankruptcy is concerned they were supposed to be "safe" because we cannot cramdown on vehicles. So instead of getting something in Bankruptcy they are getting next to nothing because debtors are just saying "here take it" and discharging the debt in 7 later on or in the context of a 7 or 13. Is that what they wanted? Well that's what they are getting!

Saw a guy just the other day who went from 65k per year to a 45k per year pace. The first thing on the list to cut, yup, you guessed it. His 30K truck. He was unable to trade it in for a less expensive vehicle, so bye bye. The Creditor will just have to live with the loss. The flow of cash just stopped there. They made their bed now we all have to lay in it. Thanx!

BTW: This is not true: "What's funny about this is that homestead exemptions have no bearing in Chapter 13--exemptions are only available in Chapter 7."

Exemptions do have a bearing in chapter 13 cases - even more so post-BAPCPA. And they are almost always claimed on Schedule C in chapter 13 cases.

Exemptions are important in chapter 13 because, in addition to the 'disposable income test', debtors must also meet a second test to confirm their chapter 13 plans. This test is a hypothetical chapter 7 liquidation test, usually called the "best interest of creditors test".

Chapter 13 creditors must get at least as much as they would have gotten in a hypothetical chapter 7 case. In determining how much equity - if any - would be available for liquidation and distribution in a chapter 7, chapter 13 debtors' attorneys must use their applicable exemptions to meet the best interest of creditors requirement.

For example, if debtors have a $100,000 house and a $50,000 mortgage, if you don't consider the homestead exemption, the chapter 13 plan would have to provide for the debtors paying in at least $50,000. Using, say, a $10,000 exemption the amount that has to be paid into the chapter 13 plan is reduced, dollar-for-dollar, by the amount of the exemption.

(The amount to be paid into the chapter 13 plan is sometimes also reduced by other factors, like the chapter 7 trustee's cost of sale, and/or the statutory chapter 7 trustee fee, sometimes re-offset by the time value of money, since the chapter 7 trustee would pay off soon, in a lump sum. These offsets - except for the use of exemptions - are basically a local practice issues. On the other hand, the use of exemptions to meet the hypothetical liquidation requirement is done nationwide.)

Patches, I've watched two dealerships disappear on the Seacoast in the last year or two. One a Lincoln/Buick the other Chevy. Both properties are on the block now. $4.3M @ 3AC +/-, building and equipment I believe for the Chevy location. A third Chevy shop was just swallowed by a bigger fish. Funny, that big steel gray arch showroom that was constructed just two or three years ago no longer has the "Hummer" sign on it... It's not going to get better any time soon.

At least YOU have job security for the foreseeable future... That's a mixed blessing, though, I know in the small vs. big picture....

Yes your right Mike. Business has been good. It's weird seeing people who would normally be on the other side and most likely (if they had the choice) be in opposition to a Plan of repayment if they were a creditor. These guys are actually talking to us about personal Bankruptcies! OMG! The Sky is falling.

To touch on AMCs correct assertion that exemptions do matter. To put it differently, the amounts that we cannot exempt either under the state or federal exemptions (one or the other) we have to pay to unsecured creditors in a 13. So if we have $10k in non-exempt assets, the debtor would have to pay $166.00 extra per month so that unsecured creditors can share at least a $10,000.00 pool over 60 months. You can see how different states could have different payouts to unsecured creditors. Some states have more generous exemptions than others. Under Federal Exemptions there are some assets that do not have an exemption that maybe you can get from the State and vice versa. But you also have what we call "Wild Card" exemptions under the Federal Exemption scheme. $6,900 worth I think....???? You can use that pretty much for anything. Renters by far, in my mind get the benefit of that "Wild Card" exemption. Most notably for IRS Refunds and most helpful in 7s.

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