Washington, DC: Some would argue that the ongoing financial crisis in America actually stems from the simple pursuit and the realization of the American dream: home ownership. There is security that comes with owning a piece of real estate, and rather than bypassing the chance to build equity by renting, Americans sought out any avenue possible to trade in the cramped apartment for real estate housing. Real estate closings, in turn, mushroomed as banks bent over backwards to make it easy for anybody to own a piece of the American dream.
But now the dream is bust, and while Congress wrestles with a bailout that raises the ceiling on the national debt in an effort to stave off disaster (and another "d" word, depression), pundits marvel at just how we got into this mess.
However there's another aspect of the credit crisis that you rarely hear about but has played a large part in the meteoric rise in foreclosures.
The new bankruptcy rules. They're tougher and more onerous. It used to be that consumers could turn to bankruptcy—as painful as it is—for debt relief, but still hang onto their homes. Filing for Chapter 7 bankruptcy would see financial assets liquidated to dismiss unpaid bills but the home in most cases was protected. The courts were clogged and the financial industry wanted to raise the bar.
While bankruptcy is still an option, it's a tougher way to go and the home is suddenly in play. While a foreclosure can be temporarily halted, it can be resumed if a court-mandated payment schedule is not kept up.
It's been a recipe for disaster. With homeowners able to acquire mortgages pretty near equal to the prior market value of the home, they were in up to their neck. The foreclosure monster rolled through city after city, destroying huge chunks of equity in its path. Multiply those foreclosures, and you multiply the pain in kind.
With bankruptcy a tougher row to hoe, the lesser evil was to walk away from the real estate. We've all seen the dramatic pictures, the neighborhoods with windows boarded up and street after street riddled with foreclosure signs. If such a picture is worth a thousand words, it can be worth millions of dollars in losses to the banks.
A recent report by the Joint Economic Committee of Congress (JECC) found that a single foreclosure could represent a $50,000 hit for the lender in the process of taking that real estate housing back onto its books. Multiply that by the tens of thousands, together with counterparty exposure to such sub-prime mortgages, and you suddenly understand why Lehman Brothers failed, AIG almost did and Merrill Lynch was bucked off its bull into the arms of a benefactor.
So yes, the folly of the banks in lending money with abandon contributed to this mess, as did the dubious wisdom of allowing such large exposure to mortgage-backed securities, chanting the mantra that 'you can't go wrong with real estate' with biblical fervor.
But the beefed-up bankruptcy rules also have a part to play in the real estate housing time bomb, and Yvonne Reina is a classic example. At 54, she had fallen behind on her mortgage payments but was hoping she could hang onto her duplex in Chicago by filing for Chapter 13 bankruptcy. However, her lawyer advised against it, citing an overly burdensome payment plan would be too much for her limited income.
In March the bank foreclosed on her duplex, adding a $50,000 liability to its books.
"I just couldn't make it work anymore," Reina said.
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