George S. May Business Blog

New blame emerges for mortgage crisis

Researches from the Federal Reserve Bank of New York have issued a report blaming the 2005 bankruptcy reform act for our current mortgage crisis. They say that the legislation, (which forced more well-to-do households, filing for bankruptcy, to file under Chapter 13 instead of Chapter 7), took the risk away from credit card lenders, shifting it to mortgage lenders, and eventually leading to an outpour of foreclosures.

For those who don’t know the difference, households who file for bankruptcy under Chapter 7 liquidation are allowed to erase their unsecured debts. That way income they were spending on those debts is instantly available to them and can go toward their mortgage. However, filing for bankruptcy under Chapter 13 does not have the same ‘perks’, as those who do are still responsible for paying their unsecured debts. The Fed researches say that those who filed under Chapter 13 and are now facing foreclosure might have been able to save their homes had the filed under Chapter 7.

But how confident are they in there assumption? Well, put it this way: Donald P. Morgan, one of the leading researchers at the New York Fed, when asked of his confidence in the blame they placed on the legislation, responded with “99 percent”.

 ”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 idea behind the legislation was to hold high-income debtors more accountable. And while it did drive down bankruptcy filings, at first, in hindsight it seems to have been a flop, as ordinary families who really needed the help were forced into further financial problems.

Related posts:

1. Mortgage delinquencies continue to climb Well, it is just natural progression. If you don’t have a job, then you can’t pay your mortgage. With unemployment hitting record numbers and still...


2. Frontier Airlines emerges from bankruptcy Somewhere, some people at Frontier Airlines are popping champagne. Why? Frontier Airlines is coming out of bankruptcy. After a while of financial struggles, Frontier has...


3. Cases flooding NY courts — experts blame recession New York State’s courtrooms are closing out the year with 4.7 million cases, the highest tally ever, and statistics point to the notion that the delays are...