The WSJ this morning fronts a story headlined "More
Debtors Use Bankruptcy To Keep Homes"; the subhed is "Chapter
13 Filings Gain In Popularity Because They Halt Foreclosures". Empirically
speaking, the thrust of the column seems a little bit dubious to me: yes, people
are filing for Chapter 13 in an attempt to keep their homes, but ’twas ever
thus, since the bankruptcy laws were revised in 2005.
Indeed, according to the handy accompanying chart, we can see that while Chapter
13 filings are up 29% year-on-year, the more popular alternative, Chapter 7,
is up 38% year-on-year. Which means that Chapter 13’s foreclosure-preventing
embrace is actually less popular than it was a year ago, accounting
for 37.5% of consumer bankruptcy filings compared to 39.2% in the second quarter
of 2006
But such filers can easily be found, of course, and the article becomes more
interesting when it wanders into the world of anecdote and doesn’t try to identify
big trends. This paragraph really scared me, included as part of the narrative
for all the world as though such things are perfectly normal:
Early this year, 47-year-old Briant Titus saw sales start to lag at his family’s
vacuum-cleaner sales business. He missed several payments on the two-story
Cape Cod home in Potterville, Mich., that he purchased 15 years ago for $139,000.
When he called his lender to find out why two recent checks hadn’t been
cashed, a manager told him that foreclosure proceedings had begun.
According to this, Mr Titus was sending mortgage payments to his lender, and
the lender wasn’t cashing them, because it had started foreclosure proceedings
without informing him! No lender should start hugely expensive foreclosure
proceedings without getting in contact with the borrower first and trying to
work things out. But this is another artifact of the securitization boom, I
guess: the servicer get paid for its foreclosure work, while the costs of foreclosure
fall on bondholders who have no say in the matter.
This is a huge problem, because once Chapter 13 proceedings have started, the
loan can’t be modified any more.
With Congress scrambling to stem foreclosures, a bipartisan group of lawmakers
has suggested altering the Bankruptcy Code. The code currently prevents mortgage
lenders from changing loan terms on a filer’s primary residence.
Right now, the lenders are in push-back mode, saying that if bankruptcy courts
could modify mortgages, then that would just make it that much harder for people
with weak credit to buy a house. Well, yes: the whole reason for the present
mess is that it was far too easy for people with weak credit to buy a house.
And this bit is just hilarious:
Lenders also worry about ripple effects on the loan portfolios they have
turned into securities and sold off to investors. If the terms of the loans
in those packages change, it could change their value to investors.
Right now I don’t think investors are overly worried about the bankruptcy code.
But in any case a loan modification is nearly always a better bet for an investor
than a foreclosure would be. So I doubt the investors are going to oppose this
proposal.