The Federal Reserve Bank of NY researchers report that the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 [BAPCPA] contributed to the rise in subprime foreclosures .
“For a state with average home equity exemption, the average subprime foreclosure rate over the seven quarters after [BAPCPA] was 12.6 percent higher than the average subprime foreclosure rate over all states over the period before [BAPCPA.] This translates to just over 32,000 more subprime foreclosures nationwide per quarter due to [BAPCPA,]” Donald P. Morgan, Benjamin Iverson and Matthew Botsch state in their paper, “Seismic Effects of the Bankruptcy Reform.”
The researchers believe that the rise in foreclosures is taking place because BAPCPA shifts credit risk from credit card and auto lenders to mortgage lenders. I think this may be partly true. But the other part of the truth about the foreclosure rise is that too many Americans are in toxic mortgages. The toxic mortgages, massive foreclosures and the high unemployment rate have conspired to slam even more Americans with foreclosure. Yes, we need to reform the bankruptcy code; but we also need to make sure that mortgages modified during bankruptcy are affordable and reasonable.