January 11, 2009
There’s no shortage of blame for the mortgage crisis that drove the economy into the ditch.
But here’s a fresh culprit: the 2005 bankruptcy reform act, which was strongly pushed by the credit card industry.
So say three researchers at the Federal Reserve Bank of New York, who argue that the legislation shifted risk from credit card lenders to mortgage lenders, helping trigger the surge in home foreclosures.
Before Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, households could erase their unsecured debts by filing for Chapter 7 liquidation. That freed up income that distressed homeowners could use to make mortgage payments.
The new law, however, forced better-off households seeking bankruptcy protection to file under Chapter 13. That chapter requires homeowners to continue paying their unsecured lenders.
In other words, say the Fed researchers, cash-strapped homeowners who might have saved their homes by filing Chapter 7 are now much more likely to face foreclosure.
“Is it just coincidence that the surge in subprime foreclosures that has rocked financial markets came right after the bankruptcy reform in 2005?” they asked. “Is that surge just about falling home prices, bad mortgage decisions and weak economic conditions?
“No and no.”
The paper’s lead author, Donald P. Morgan, a research officer at the New York Fed, said last week in a phone interview that he was “99 percent confident” that the bankruptcy reform law was a major reason for the foreclosure crisis and the falling housing prices that have affected virtually every homeowner in the country.
The National Association of Realtors recently reported that the average sale price of an existing home fell 12.3 percent, to $224,200, over the 12 months ending in November.
“Before the reform, overindebted households might file bankruptcy and get rid of their credit card debt, and that would free up income to pay the mortgage,” Morgan said. “The new law blocks that escape route and forces better-off households to continue paying credit card debt, which makes it harder than before to continue paying the mortgage.”
The conclusions of Morgan and his colleagues echo earlier findings that the new law’s tougher requirements appear to have increased the number of people defaulting on their mortgages or walking away from their homes rather than seeking bankruptcy protection.
“One of the great lessons and ironies” of the new law, Treasury Department economist David P. Bernstein wrote in a recent paper, was that, by increasing the dollar value of assets susceptible to default, it has weakened many of the financial institutions that sought the new law in the first place.
Aimed at making debtors take more “personal responsibility” for their debts, the new law did succeed in driving down bankruptcy filings at first. But if the idea of bankruptcy reform was to prevent “can-pay” and high-income debtors from abusing the bankruptcy system, many experts say the law has been a bust.
Drawing on 2007 bankruptcy data, a group of academic experts recently suggested that those purged from the bankruptcy rolls, far from being high-income deadbeats, “appear to have been ordinary American families in serious financial distress.”
To be sure, bankruptcy reform was by no means the primary cause of the subprime mortgage debacle, the causes of which are many and varied: loose monetary policy, lax lending standards, poor regulatory oversight and the unsustainable expectations of homeowners and Wall Street investors.
Yet growing numbers of experts have concluded that families filing for bankruptcy now owe more debt than before and are having a much harder time servicing that debt with disposable income.
Indeed, default and foreclosure rates for home mortgages have risen sharply since the enactment of the bankruptcy reform law. The Government Accountability Office last month reported that through the second quarter of 2008, more than four out of every 100 mortgages were in the foreclosure process or were more than 90 days past due.
Those were the highest reported levels in the 29 years since the Mortgage Bankers Association began keeping complete records, the GAO said. And more than half the overall increase was attributable to the subprime market.
Those trends are rippling through the Kansas City area housing market, where the average resale price of existing homes has fallen 12 percent over the year ending in November, to $136,140.
“The economic situation we’re in now is so dire that we’re getting mortgage companies doing things they’ve never done before,” said Kansas City bankruptcy lawyer Dan Hall.
Hall cited the case of one client whose mortgage lender, without prompting, agreed to delay all of the client’s arrearages until the end of the mortgage note.
“Foreclosure sales are more easily canceled now if the debtor contacts the mortgage company and tries to work something out,” he said.
So far, however, lenders’ increasing flexibility has proved to be a finger in the dike. More than 1.5 million homes have been lost through subprime foreclosures, and an additional 2 million families with subprime loans are in danger of losing their homes, according to the Center for Responsible Lending, a nonpartisan research group.
“Because the foreclosure crisis is at the root of this recession, the continuing flood of foreclosures stymies any chance of real economic recovery,” Michael Calhoun, president of the group, said in a written statement. “Any economic stimulus would be a Band-Aid solution unless we stop the hemorrhaging in our housing market.”
The situation has become so bad — 23 states saw foreclosures increase 100 percent or more in the three years though the second quarter of 2008 — that even once-staunch backers of the bankruptcy reform law are now pushing for something that they would have deemed unthinkable only a year ago: allowing bankruptcy judges to modify mortgages.
On Thursday, Citigroup backed legislation that would allow bankruptcy courts to alter mortgage rates for borrowers at risk of losing their homes.
The banking giant, which has received $45 billion in government bailout money since last fall, accounted for 7 percent of the home-loan servicing market in the United States as of Sept. 30, according to the Inside Mortgage Finance newsletter.
The proposed bill’s “cram-down” provision would be limited to mortgages made before the law’s enactment. Democratic lawmakers said they would attach the proposal to President-elect Barack Obama’s stimulus package.
Most bankers continue to oppose the proposal, arguing that it would force them to increase mortgage rates because they would have to charge more for loans that might be altered later by a judge.
“We remain opposed to bankruptcy cram-down legislation because of the destabilizing effect it will have on an already turbulent market,” two senior officials of the Mortgage Bankers Association said Thursday in a statement.
But if signed into law, the proposal would almost certainly help alleviate the mortgage crisis by giving borrowers more leverage and encouraging voluntary arrangements between borrowers and lenders, said U.S. Bankruptcy Judge Arthur Federman of the Western District of Missouri.
“If lenders are subject to having their mortgages modified by the court, then it would foster out-of-court workouts,” he said. “And if out-of-court workouts aren’t done, then, under this legislation, the lenders would end up receiving what they would get in a foreclosure sale over time, plus interest. … So, theoretically there shouldn’t be any more harm to their interests than if the borrower handed them the key.”
As a judge, Federman stressed that he is not allowed to take a position on whether the legislation should be enacted. But he said that the bankruptcy courts have the resources to deal with the expected extra caseload if it does become law.
“It would have a huge impact on borrowers,” he said. “Because right now if they have a house that is worth less than the value of their mortgage, they don’t really have much incentive to continue making payments on the house. If, however, they can reduce the mortgage to the current value of the house and accordingly reduce their payments, then they have that incentive.”
Bankruptcy practitioners say it’s more than a little ironic that the bankruptcy reform law may turn out to be the vehicle for putting out the foreclosure fire. Even under the old bankruptcy law, bankruptcy judges were forbidden to alter mortgages on principal residences.
“It would be as fundamental a change as the (bankruptcy reform law) was,” said bankruptcy lawyer Hall. “It was untouchable before, one of the Ten Commandments: You can’t alter the terms of a primary mortgage on a person’s residence.”
Somewhat balefully, he added: “That’s why I don’t think it’s going to pass.”
--------------------------------------------------------------------------------
Consumer bankruptcies
There were 1.043 million bankruptcy filings nationwide in the 12 months ending Sept. 30, 30 percent more than the 801,269 filings in fiscal 2007 and the highest number since the 2006 implementation of the bankruptcy reform law.
In Missouri, filings totaled 24,419, up 21.2 percent. In Kansas, filings totaled 8,642, up 11.8 percent.
In the U.S. as a whole, filings totaled 3.38 per 1,000 population. Missouri ranked No. 10 in the nation in per capita bankruptcy filings, with 4.13 per 1,000 population. Kansas ranked 24th in the nation, with 3.1 per 1,000.
The hardest-hit states based on per capita ratios:
Tennessee, 7.27
Nevada, 6.39
Georgia, 5.96
Alabama, 5.92
Indiana, 5.89
In the best shape:
Alaska, 1.24
Hawaii, 1.41
Wyoming, 1.46
South Carolina, 1.79
Texas, 1.80
There’s no shortage of blame for the mortgage crisis that drove the economy into the ditch.
But here’s a fresh culprit: the 2005 bankruptcy reform act, which was strongly pushed by the credit card industry.
So say three researchers at the Federal Reserve Bank of New York, who argue that the legislation shifted risk from credit card lenders to mortgage lenders, helping trigger the surge in home foreclosures.
Before Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, households could erase their unsecured debts by filing for Chapter 7 liquidation. That freed up income that distressed homeowners could use to make mortgage payments.
The new law, however, forced better-off households seeking bankruptcy protection to file under Chapter 13. That chapter requires homeowners to continue paying their unsecured lenders.
In other words, say the Fed researchers, cash-strapped homeowners who might have saved their homes by filing Chapter 7 are now much more likely to face foreclosure.
“Is it just coincidence that the surge in subprime foreclosures that has rocked financial markets came right after the bankruptcy reform in 2005?” they asked. “Is that surge just about falling home prices, bad mortgage decisions and weak economic conditions?
“No and no.”
The paper’s lead author, Donald P. Morgan, a research officer at the New York Fed, said last week in a phone interview that he was “99 percent confident” that the bankruptcy reform law was a major reason for the foreclosure crisis and the falling housing prices that have affected virtually every homeowner in the country.
The National Association of Realtors recently reported that the average sale price of an existing home fell 12.3 percent, to $224,200, over the 12 months ending in November.
“Before the reform, overindebted households might file bankruptcy and get rid of their credit card debt, and that would free up income to pay the mortgage,” Morgan said. “The new law blocks that escape route and forces better-off households to continue paying credit card debt, which makes it harder than before to continue paying the mortgage.”
The conclusions of Morgan and his colleagues echo earlier findings that the new law’s tougher requirements appear to have increased the number of people defaulting on their mortgages or walking away from their homes rather than seeking bankruptcy protection.
“One of the great lessons and ironies” of the new law, Treasury Department economist David P. Bernstein wrote in a recent paper, was that, by increasing the dollar value of assets susceptible to default, it has weakened many of the financial institutions that sought the new law in the first place.
Aimed at making debtors take more “personal responsibility” for their debts, the new law did succeed in driving down bankruptcy filings at first. But if the idea of bankruptcy reform was to prevent “can-pay” and high-income debtors from abusing the bankruptcy system, many experts say the law has been a bust.
Drawing on 2007 bankruptcy data, a group of academic experts recently suggested that those purged from the bankruptcy rolls, far from being high-income deadbeats, “appear to have been ordinary American families in serious financial distress.”
To be sure, bankruptcy reform was by no means the primary cause of the subprime mortgage debacle, the causes of which are many and varied: loose monetary policy, lax lending standards, poor regulatory oversight and the unsustainable expectations of homeowners and Wall Street investors.
Yet growing numbers of experts have concluded that families filing for bankruptcy now owe more debt than before and are having a much harder time servicing that debt with disposable income.
Indeed, default and foreclosure rates for home mortgages have risen sharply since the enactment of the bankruptcy reform law. The Government Accountability Office last month reported that through the second quarter of 2008, more than four out of every 100 mortgages were in the foreclosure process or were more than 90 days past due.
Those were the highest reported levels in the 29 years since the Mortgage Bankers Association began keeping complete records, the GAO said. And more than half the overall increase was attributable to the subprime market.
Those trends are rippling through the Kansas City area housing market, where the average resale price of existing homes has fallen 12 percent over the year ending in November, to $136,140.
“The economic situation we’re in now is so dire that we’re getting mortgage companies doing things they’ve never done before,” said Kansas City bankruptcy lawyer Dan Hall.
Hall cited the case of one client whose mortgage lender, without prompting, agreed to delay all of the client’s arrearages until the end of the mortgage note.
“Foreclosure sales are more easily canceled now if the debtor contacts the mortgage company and tries to work something out,” he said.
So far, however, lenders’ increasing flexibility has proved to be a finger in the dike. More than 1.5 million homes have been lost through subprime foreclosures, and an additional 2 million families with subprime loans are in danger of losing their homes, according to the Center for Responsible Lending, a nonpartisan research group.
“Because the foreclosure crisis is at the root of this recession, the continuing flood of foreclosures stymies any chance of real economic recovery,” Michael Calhoun, president of the group, said in a written statement. “Any economic stimulus would be a Band-Aid solution unless we stop the hemorrhaging in our housing market.”
The situation has become so bad — 23 states saw foreclosures increase 100 percent or more in the three years though the second quarter of 2008 — that even once-staunch backers of the bankruptcy reform law are now pushing for something that they would have deemed unthinkable only a year ago: allowing bankruptcy judges to modify mortgages.
On Thursday, Citigroup backed legislation that would allow bankruptcy courts to alter mortgage rates for borrowers at risk of losing their homes.
The banking giant, which has received $45 billion in government bailout money since last fall, accounted for 7 percent of the home-loan servicing market in the United States as of Sept. 30, according to the Inside Mortgage Finance newsletter.
The proposed bill’s “cram-down” provision would be limited to mortgages made before the law’s enactment. Democratic lawmakers said they would attach the proposal to President-elect Barack Obama’s stimulus package.
Most bankers continue to oppose the proposal, arguing that it would force them to increase mortgage rates because they would have to charge more for loans that might be altered later by a judge.
“We remain opposed to bankruptcy cram-down legislation because of the destabilizing effect it will have on an already turbulent market,” two senior officials of the Mortgage Bankers Association said Thursday in a statement.
But if signed into law, the proposal would almost certainly help alleviate the mortgage crisis by giving borrowers more leverage and encouraging voluntary arrangements between borrowers and lenders, said U.S. Bankruptcy Judge Arthur Federman of the Western District of Missouri.
“If lenders are subject to having their mortgages modified by the court, then it would foster out-of-court workouts,” he said. “And if out-of-court workouts aren’t done, then, under this legislation, the lenders would end up receiving what they would get in a foreclosure sale over time, plus interest. … So, theoretically there shouldn’t be any more harm to their interests than if the borrower handed them the key.”
As a judge, Federman stressed that he is not allowed to take a position on whether the legislation should be enacted. But he said that the bankruptcy courts have the resources to deal with the expected extra caseload if it does become law.
“It would have a huge impact on borrowers,” he said. “Because right now if they have a house that is worth less than the value of their mortgage, they don’t really have much incentive to continue making payments on the house. If, however, they can reduce the mortgage to the current value of the house and accordingly reduce their payments, then they have that incentive.”
Bankruptcy practitioners say it’s more than a little ironic that the bankruptcy reform law may turn out to be the vehicle for putting out the foreclosure fire. Even under the old bankruptcy law, bankruptcy judges were forbidden to alter mortgages on principal residences.
“It would be as fundamental a change as the (bankruptcy reform law) was,” said bankruptcy lawyer Hall. “It was untouchable before, one of the Ten Commandments: You can’t alter the terms of a primary mortgage on a person’s residence.”
Somewhat balefully, he added: “That’s why I don’t think it’s going to pass.”
--------------------------------------------------------------------------------
Consumer bankruptcies
There were 1.043 million bankruptcy filings nationwide in the 12 months ending Sept. 30, 30 percent more than the 801,269 filings in fiscal 2007 and the highest number since the 2006 implementation of the bankruptcy reform law.
In Missouri, filings totaled 24,419, up 21.2 percent. In Kansas, filings totaled 8,642, up 11.8 percent.
In the U.S. as a whole, filings totaled 3.38 per 1,000 population. Missouri ranked No. 10 in the nation in per capita bankruptcy filings, with 4.13 per 1,000 population. Kansas ranked 24th in the nation, with 3.1 per 1,000.
The hardest-hit states based on per capita ratios:
Tennessee, 7.27
Nevada, 6.39
Georgia, 5.96
Alabama, 5.92
Indiana, 5.89
In the best shape:
Alaska, 1.24
Hawaii, 1.41
Wyoming, 1.46
South Carolina, 1.79
Texas, 1.80
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