Bankruptcy’s often overlooked tie to homeownership

By  Bradley Markano • May 4th, 2011 • Category: Charts

This report discusses the advantages and disadvantages of bankruptcy for troubled current homeowners and would-be future homeowners.

Chart last updated 5/4/11

2009 2008
Total CA Bankruptcies

Data courtesy of the American Bankruptcy Institute

Homeowners have found it dramatically more difficult to pay their bills during the recent Great Recession than in the past.  A few of the footprints on the path leading to the current homeownership trauma include:

  • the Federal Reserve’s belated decision in August 2004 to put a squeeze on the availability of money (credit)  by increasing  short-term interest rates (the triggering event for the Great Recession);
  • the Wall Street bond market’s massive 2002 to 2006 expansion into the mortgage banking market, which erroneously allowed anyone to qualify for any type of mortgage loan (bringing on a financial crisis concurrent with the onset of the Great Recession); and
  • the constant lobbying effort by mortgage bankers to preempt homeowners’ need to adjust loan balances (cramdowns) during the Great Recession. By 2005, their efforts caused Congress to bar bankruptcy judges from reducing a homeowner’s mortgage balance to match the reduced value of the home securing that mortgage.

In the absence of bankruptcy-ordered cramdowns, the relief available to homeowners in bankruptcy is limited. Nonetheless, bankruptcy is not without advantages for some underwater homeowners. The extent of these advantages is the subject of this report.