Donald P. Morgan, a vice president for the Federal Reserve Bank of New York, sets forth an analysis that lays significant responsibility for the sub-prime foreclosure crisis at the doorstep of those who pushed through the 2005 bankruptcy reform.
Key findings include:
- After the bankruptcy abuse reform (BAR) took effect in October 2005, foreclosures on
subprime mortgages surged nationwide.
- Prior to BAR, overly indebted borrowers could file bankruptcy to free up income to pay their mortgage by discharging unsecured debts; BAR eliminated that option for better-off filers through a means test and other requirements, making it more difficult to save one’s home by filing bankruptcy.
- For a state with an average home equity exemption, the subprime foreclosure rate after BAR rose 11 percent relative to average before the reform; given the number of subprime mortgages nationwide, that translates into 29,000 additional subprime foreclosures per quarter nationwide.
While these general conclusions come as little surprise, the report is worth a read for the specific statistics and trends revealed.