Fascinating front page WSJ article today, titled More Debtors Use Bankruptcy To Keep Homes.
It seems that Chapter 13 filings are gaining in popularity. Why? Because they halt foreclosure proceedings:
“Last month, as the nation’s housing slump continued, consumer
bankruptcy filings increased almost 23% from a year earlier —
representing nearly 69,000 people — according to the American
Bankruptcy Institute, a nonprofit research group whose members include bankruptcy attorneys, judges and lenders. Overall, consumer bankruptcy filings were up 44.76% during the first nine months of this year.
In some areas where the real-estate boom was especially heated, the increase in filings has been even sharper — especially for a type of bankruptcy that allows homeowners to halt foreclosures on their homes . . .
In recent months, however, an increasing number of homeowners have filed for bankruptcy under Chapter 13, which staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time — usually three to five years. To qualify, debtors must have a regular income and must stay current on their new bills. About four in 10 filers today are filing under Chapter 13 — up from three in 10 two years ago. The 2005 change in bankruptcy laws was designed in part to shift more filers to Chapter 13, which forgives less debt than Chapter 7.”
We can expect to see a whole lot more these types of filings in the coming months and years. Why? One word: RESETS.
The ongoing APR mortgage reset process isn’t expected to peak until some time in 2008. Following that, we see a new surge in resets, as Option Adjustable Mortgages begin to come up in 2010-11. Note that these are non-subprime mortgages.
Here is is another intriguing pair of charts, this one from Merrill Lynch (via the IMF):
The pair of charts above suggests that as the last cycle progressed, Credit quality
mattered less each subsequent year. Eventually, it seems that mortgage underwriters were giving loans to
just about anyone in order to generate fees, commissions, and re-sellable paper . . .
More Debtors Use Bankruptcy To Keep Homes
Chapter 13 Filings Gain In Popularity Because They Halt Foreclosures
WSJ, October 23, 2007; Page A1
Global Financial Stability Report:
Financial Market Turbulence: Causes, Consequences, and Policies
IMF, September 2007