On 8/13/07, David B. Shemano <[EMAIL PROTECTED]> wrote: > On a semi-related noted, here is a little Bankruptcy Code trivia that > explains in part the recent popularity of submprime mortgages. Until about a > decade ago, if a homeowner filed bankruptcy, and the value of the home was > less than the debt, the homeowner could use Chapter 13 of the Bankruptcy Code > to "stripdown" the mortgage. In other words, if the home was originally > purchased for $550k with a $500k mortgage, but the home had a value as of the > bankruptcy (as determined by the bankruptcy judge based upon appraisal > evidence) of $400k, the Bankruptcy Code permitted the homeowner to > essentially rewrite the debt into a $400k secured loan and a $100k unsecured > loan, and the unsecured portion could then be effectively discharged. For > obvious reasons, lenders did not like this, especially when they disagreed > with the appraisal and/or the market later appreciated and the homeowner > benefited from the appreciation. > > So about ten years ago, the lenders got the Bankruptcy Code changed and now > there is a statute in Chapter 13 that prohibits the modification of > residential mortgages. This change in the law created an incentive for > subprime mortgages. Prior to the change, very few submprime loans were made > because submprime borrowers are probable candidates for bankruptcy and > lenders would not only have the risk of a default, but the stripdown in a > Chapter 13. Because of the change of the law, the bankruptcy risk of > marginal loans was eliminated, so the only remaining risk was default, which > is much more manageable. The subsequent boom in subprime mortgages was not > unrelated.<
question: what happens if the borrower _just can't pay_? If the borrower owes $100k but does not have the resources. are his or her wages garnisheed? > > David Shemano > > > >> As subprime mortgages crater, here's one of the likely -- and > >> as-yet-undiscussed -- consequences: Deficiency judgments, and perhaps a > >> massive wave of them. > >> > >> Here's how it works: Buying a $500,000 house, you put $50,000 down and > >> take out an interest-only housing loan for $450,000. Then you can't make > >> your house payments, two or three years later, and the bank forecloses. > >> But the foreclosure is part of an enormous set of regional and national > >> foreclosures, dumping houses on the market while mortgage lenders are > >> cutting back sharply on new home loans. Far fewer buyers are chasing far > >> more homes, so housing prices fall sharply; the bank sells your $500,000 > >> house for $375,000. > >> > >> You're out of a home -- and you're still carrying $75,000 in > >> interest-bearing debt. > >> > >> Where have we seen this dynamic before? Here's one noteworthy example: > >> > >> In his 1965 book The Cornbelt Rebellion: The Farmer's Holiday > >> Association, the historian John Shover discussed the metastasizing farm > >> foreclosures in Depression-era Iowa, which (among other things) followed > >> the burst of a farm-buying bubble caused by the decline of European > >> grain production during the First World War. American farmers rushed to > >> buy up land on borrowed money so they could expand their production for > >> hungry European markets; fifteen years later, still carrying debt, they > >> found themselves caught in a cycle of sharply declining crop prices. And > >> then the trap closed. > >> > >> From pages 16-17: > >> > >> Between 1921 and 1933, 13 percent of Iowa farmland was sold at > >> foreclosure. Yet at the end of 1932, one billion dollars of debt was > >> still outstanding on 45 percent of the land in the state...Land values > >> had declined so greatly (from $140 per acre in the late twenties to $92 > >> per acre in 1932) that proceeds from a forced sale usually did not cover > >> the full amount of the debt. As a result, the debtor was left with a > >> deficiency judgment to cover the balance. In 1921, 26.5 percent of > >> foreclosures in eighteen sampled Iowa counties ended with a bid for less > >> than the amount of the debt; in 1932, 74 percent carried a deficiency > >> judgment. > >> > >> This number will be worth watching in the years to come, but here's my > >> guess: A significant number of families who took out subprime housing > >> loans will not only lose their homes, but will be left with a crushing > >> load of debt that will inhibit their recovery and hamper their ability > >> to find new housing. > >> > >> Posted on Sunday, August 12, 2007 at 6:33 PM | Comments > >> > >> > >> > -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
