Credit Cards and the Mortgage Meltdown
The role of subprime lenders in inflating the housing bubble, then bringing down the whole economy has received plenty of headlines. But there has been little attention paid to the role of credit card lending and BAPCPA in the current home foreclosure crisis.
A new academic paper, Bankruptcy Reform and Foreclosure, argues that the 2005 bankruptcy amendments are deepening the mortgage crisis. The article was written by David Bernstein, an economist at the U.S. Treasury who chose to post this analysis as private citizen listing only his home address and home e-mail address. Drawing on data from the Survey of Consumer Finance, he links credit card debt, access to bankruptcy, and mortgage foreclosures. If more families could use bankruptcy to deal with their credit card debts, more could avoid foreclosure on their homes.
Bernstein studies families paying more than 40% of their income on home mortgages (in the trade, known as highly leveraged). This group is 21 times more likely to default on a mortgage than homeowners below the 40% mark. He notes that relieving these high-leverage families of their credit card payment obligations would permit about 1.5 million households to bring their home mortgage payments under 40%, increasing the odds substantially that they could keep their homes. By restricting access to bankruptcy, he argues that "BAPCPA increased home foreclosures, increased the dollar value of financial assets in default, and put downward price pressure on real estate markets."
One implication of Bankruptcy Reform and Foreclosure is more homeowners should consider bankruptcy in order to save their homes. Even if they cannot rewrite the mortgage, they may write off enough other debt so that they can still meet their payments. Whether that will work depends on the kind of mortgage payment structure they have, but it is a point that more families should think about.
The paper is a sharp reminder that bankruptcy is not simply a debtor-versus-creditor battle. One creditor's gain can be another creditor's loss. During the Bankruptcy Wars leading up to BAPCPA, I spoke with mortgage lenders about the pending legislation, urging them to weigh in against making bankruptcy tougher. The uniform response was "the bill doesn't affect us." But the bankruptcy laws favoring credit card companies did affect the mortgage lenders. Even today, as Indy Mac shuts down and Fannie and Freddie need the federal government's backing to stay alive, few people are connecting the dots that link family economic health, bankruptcy, consumer debt and mortgages.