Dollars and Jens
Thursday, February 21, 2008
mortgages and bankruptcy
Kim and Robert Canfield filed for bankruptcy last summer to save their home from foreclosure. The Saugus couple makes about $5,500 a month after taxes. Their monthly mortgage payment had climbed above $3,000. The house has been in Robert's family since the 1920s, but they could no longer afford the payments.Mortgages are treated differently in bankruptcy than most other secured credit, and there's a bill in Congress to make the treatment more similar.
The bill is strongly opposed by the mortgage industry, which warns that interest rates would rise for all borrowers. The industry says the mortgage exception protects lenders against a potential loss of revenue, which lets them offer lower interest rates. The legislation would apply solely to existing loans, but the industry says it still would undermine investor confidence that future mortgages won't again be modified.While there will be some people who might file for bankruptcy to strip down a mortgage who wouldn't otherwise, and some people, like (apparently) the Canfields, will enter bankruptcy with much more undersecured mortgage debt than non-mortgage debt, the primary impact of this legislation is to move creditors' assets from mortgage holders to other creditors. Mortgage rates for people with bad credit would go up, but interest on other kinds of loans might well come down as a result of this.
One always wonders exactly what it is that happened to someone to get them into a mortgage with monthly payments more than half their take-home pay, so I'll include the rest of the story:
The Canfields bought their home from a relative in 1996 for $155,000. For the next five years, they made regular payments on a conventional mortgage loan. Then, between 2001 and 2004, they refinanced three times, ultimately borrowing $330,000. They used much of the money to repay thousands of dollars in credit card debts.A combination, then, of a drop in income and a simple piling of debt onto a loan that seems to have had at least some kind of interest rate adjustment, though I'm a little surprised that it only took the payment from $2400 to $3200. In any case, note that this is one of the reasons, under current bankruptcy law, that people are sometimes advised not to borrow against their homes to pay down unsecured debt: much of this originated as ordinary unsecured consumer debt that could have been adjusted in bankruptcy without their losing the home.
The last loan, from Long Beach Mortgage, a subsidiary of Washington Mutual, carried an introductory monthly payment of $2,400. The Canfields were making as much money as they ever had. Robert pulled in good overtime driving a trash truck. Kim was working three jobs. The payments were affordable.
Over the next two years, Kim took a full-time job at a call center and Robert's overtime diminished. In 2006, when the interest rate on the mortgage loan started climbing, the Canfields fell behind.