BAPCPA’s Unexpected Foreclosure Push
By Foreclosure-Fighter Staff Writer
The hundreds of millions of dollars spent by the credit card industry in lobbying efforts finally yielded fruit in 2005: the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was set into action in October of that year. But no one predicted the effect the Act would have on foreclosures.
The reforms in bankruptcy legislation included tightened qualification standards for Chapter 7 filings—many of those with incomes more than the median can now only qualify for Chapter 13 bankruptcy. Chapter 7 filings allow filers to liquidate unsecured debts, and for some homeowners that means they can funnel more money toward their mortgage payments.
Chapter 13 filings, on the other hand, provide a payment plan for debtors to catch up on both secured and unsecured debts. The BAPCPA laws mean that more bankruptcy filers have to file under Chapter 13, which means more people have less money to put toward their mortgages. The result may be more mortgage defaults, and, eventually, more foreclosures.
If this sounds confusing, don't feel bad. Even the banks that supported the legislation failed to predict the effect the new laws could have on their investments. When the housing market crashed, banks found that their mortgage-backed loans were worth less than ever before, according to AzStarBiz.net.
In fact, sources show that lending banks have already had to write down $40 billion in mortgage-related losses, a number that is likely to increase as the nation's foreclosure crisis continues.
While the collapse of the housing market can be seen as an inevitable correction of unrealistically-inflating prices and the large number of high-risk subprime mortgage loans written over the past several years, the enormous surge in foreclosures may have been worsened by the BAPCPA changes.
A startling statistic reported on AzStarBiz.net reveals that among homeowners who are three or more months behind on mortgage payments, 70% are current on credit card payments! People are literally letting their houses go in order to pay their credit card bills.
This skewed prioritization shows the impact BAPCPA has had on debtors around the country. Even as banks' profits from the plummet of mortgage loans, annual income from credit cards has reportedly increased more than $1 billion since 2005.
Sources suggest that, because of borrowers' greatly limited access to Chapter 7's "escape route" from mortgages, foreclosure rates are soaring. And everybody loses: banks lose money on loans, families lose their homes, and neighborhoods see decreases in property values.
The Center for Responsible Lending (CRL) has cited another problem for bankruptcy filers looking to save their homes from foreclosure. Because Chapter 13 bankruptcy courts can't modify the terms of a mortgage, including interest rates, borrowers with adjustable rate mortgages may not be able to keep their homes even after filing bankruptcy.
In fact, the CRL estimates that as many as 2/3 of Chapter 13 petitioners will eventually lose their homes because of rate hikes.
What's next for struggling homeowners? Senator and Presidential candidate Chris Dodd (D-CT) has announced plans for legislation that would largely undo the changes made by BAPCPA. For the latest updates about foreclosure and bankruptcy news, continue checking Foreclosure-Fighter's website.