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August 28, 2005
Bankruptcy Bill + Housing Bubble = Disaster
Under the new bankruptcy regulations, homeowners will no longer necessarily be able to hand the keys to the bank and move on. Lenders will, in many cases, have the option of coming after them for virtually everything else they've got — income, money in bank accounts and other assets.Homeowners who have refinanced may have unwittingly put themselves at the greatest risk. State regulations will still offer financial protections for buyers who have their original mortgages.
The reason homeowners who have refinanced are at risk is because state law does not allow banks to go after the assets or income of the holder of an original mortgage following a foreclosure. But borrowers are often asked to waive those protections when they refinance — and many do so without even knowing it.
Here’s how foreclosures use to work. A borrower (here a homeowner) would no longer be able to make payments. After falling behind, the bank would send a certain number of notices giving the homeowner the opportunity to catch-up on his payments. If the homeowner failed to do so, the lender would foreclose. The lender would have title to the house and would usually sell it in an attempt to recoup some of the losses.
What’s important to remember about the old process is lenders usually only had the ability to go after one of the borrower’s assets – namely, their house. In essence, the bank bore the risk of market devaluation. Now, the bank can sue the consumer for any difference between the sale price and the total amount of the debt.
Here’s an example that is oversimplified to illustrate the difference between the old and new arrangements. Homeowner (H) obtains a $500,000 mortgage. Right off the bat, H has problems and can’t make payments, so the bank forecloses on the loan. Suppose the bank sold the house for $400,000. Under the old rules, the bank would usually bear the entire risk of the loss – here, $100,000. After selling the house, the bank would not have the legal right to sue the homeowner for the difference.
Now that situation has changed. Using the same example from the preceding paragraph, the bank now has the legal right to sue the homeowner for the remaining balance of the loan – here, $100,000. This makes an incredibly bad situation much worse. People stop paying loans because they are in economically difficult times. Instead of giving the consumer some breathing space, the new bill allows the bank to not only sell the consumers main asset, but to attach a judgment on the consumers other assets. This further burdens the consumer and makes it far more difficult to get out of a bad financial situation.
Now, let’s play this out on a national scale to see what happens. Suppose the housing bubble starts to burst. As a result, people lose confidence in the economy and start to spend less. Because consumer spending is responsible for 2/3 of US GDP, the economy starts to slow. Unemployment starts to increase. As a result of unemployment, foreclosures increase. Because housing prices are decreasing, banks selling houses at foreclosure auctions don’t recoup the entire loan amount. Now, the bank initiates a legal preceding against their previous borrower to recoup the difference between the loan amount and the amount the bank received at the foreclosure sale. The consumer – who is already unemployed, now gets burdened with a judgment for the difference.
Welcome to the indentured servant world of the Bush administration.
Posted by Hale Stewart at August 28, 2005 02:22 PM | Permalink
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Comments
Really good post, Hale.
I wonder what will happen politically as a consequence of these things. Remember that Democrats have supported expansion of predatory lending practices so long as there is some sort of political set-aside in the form of racial or professional patronage. Indeed, our Al GREEN voted for this bankrupty bill and our county chairman rushed to his defense in this offical party blog.
In fact, our party does not actually support the regulation of anything today. We have piled-on to the the de-regulation of everything and to just plain old control fraud like ENRON and the government-guaranteed and government-subsidized bandwidth- auctions, land-speculation, arms-barter, tax-abatement and fly-by-night real-estate deals of every sort.
The huge cities of Texas with their Democratic majorities are rife with these practices. A brace of non-white Democratic elected officials in South Dallas are on the verge of jail, but not the all-white bond-lawyers of either or no party who actually rule Texas cities, including Houston.
We "jes wanna he'p ever'body", well everybody stealing billions from the public credit, fisc, or domain who will kick back a few thousand to our glad-handing, shallow, and corrupt or just stupid office-seekers.
We can rant about the right-wing extremists, but they have an explanation for everything that is linked to a sense of justice or, at least, of retribution. The are always willing to find a scapegoat. But, we are the ones unable to even look for a real culprit.
Thus, all Democrats suffer when our party leaders start playing the cover-up, blame-shifting, bi-partisan commission games that are an integral part of both indirect taxation and monopoly rent-sharing.
The problem is that the GOP has our number. They suffer some of our rent-sharing and blame-shifting because they know that every time the Vichy Democrats get away with it, the GOP noose around this party and everything it has stood for is one notch tighter.
Our party lacks the intellectual and political dscipline to oppose anything, so the GOP is going to leave us holding the bag. We seem to be the dumb-fucks of bi-partisan concession-tending, the sit-com party, the SEINFELD/CONSTANZA "Party about Nothing".
Posted by: John Robert BEHRMAN at August 28, 2005 03:43 PM