The 2005 bankruptcy law was harmful to homeowners in Washington state and across the nation. It helped instigate more than 200,000 mortgage foreclosures, according to a 2011 study by economists at the New York Federal Reserve. That is also my analysis.
Mortgage defaults increased 15 percent and the increase for high net-worth homeowners was even higher.
The Bush era changes in the bankruptcy laws were sponsored by the banking industry which attempted to restrict the liquidation and reorganization rights of honest, hard working individuals.
The bill, making it more difficult to file for bankruptcy, was signed into law by President Bush after easily passing in Congress – despite strong opposition from consumer groups.
But the study’s economists – Donald P. Morgan, Benjamin Iverson, and Matthew Botsch – point out the law was also harmful to credit card holders. It made it too hard for homeowners to ease their credit-card debt in filing bankruptcy. In turn, that made it impossible for homeowners to pay their mortgages.
The economic study, which totals 11 pages, also concludes that some 116,000 subprime mortgages went into default in 2006.
Additionally, the economists state the foreclosures depressed home prices – below the amounts borrowers owed their lenders. The widespread decreases in home values meant the homeowners found their situations unworkable.
It was a vicious financial cycle. Homeowners could not afford their payments, nor were they able to pay off the bank loans by refinancing and nor could they sell their homes.
“By making it harder for borrowers to avoid paying credit card debt, [the 2005 bankruptcy law] made it more difficult for them to pay their mortgages, so foreclosure rates rose,” according to the study.
On the other hand, the banks benefited from the law.
They were able to increase the amount of consumers’ debt without the approval of cardholders. The banks encouraged the borrowers to increase their debt at low interest rates. But then, the banks launched what is called “retroactive rate increases.” That enabled them to significantly hike the interest rates charged to cardholders on the debt loads.
The banks’ scheme was not disallowed by Congress until 2009.
My conclusions about the 2005 bankruptcy law:
This misguided attempt, together with the Bush administrations’ lack of control over the banking industry, has led to the deepest recession in the modern era.
It turns out that more bankruptcies will be necessary as a result of the banking industries’ gouging of the American economy.