A new report by the National Bureau of Economic Research (NBER) says that the Bankruptcy Prevention Act could have helped cause the subprime mortgage crisis and subsequent recession. How? Well, the bankruptcy law made it really difficult to declare bankruptcy. Before that, homeowners could declare bankruptcy on their personal debt, freeing up funds to pay their mortgages and save their homes.With bankruptcy ruled out as an option, homeowners relied on their home equity to pay bills.
Researchers found that mortgage default rates rose 14%, and 200,000 more families lost their homes per year after the bill was passed. The law was enacted at the request of banks who said consumers were abusing bankruptcy to just avoid paying their bills. (Source: Wenli Li, Michelle J. White, Ning Zhu, Did Bankruptcy Reform Cause Mortgage Default to Rise?, NBER, May 10, 2010)
What It Means to You
It is really difficult to tell which of the millions of small changes - whether in legislation, bank policies or Greek debt - will create a major shift in the economy. Even if you can forsee what will happen, it is impossible to know exactly when. As a reader commented yesterday, "I have a big dilemma today, which is what to do with my 401K. I saw the 2008 market calamity and moved my funds into a 401K CD. ...The dilemma stems from the fact I don't know "when" the dollar will collapse, and what gold will do over the next 3 years. With all the Fed and government manipulations, this could play out 2-3 years before the whole systems breaks down.."
The dilemma about not knowing when the dollar will collapse is one we all share - trying to time the market. It is virtually impossible. Most financial planners will tell you that, in times of uncertainty, you reap the most return with the least risk with a well-diversified portfolio. Tweak it every six months, becoming more defensive in a downturn and more aggressive in an upturn. If you can do better than that, then write a book telling the rest of us how you did it and you will make millions!
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- Causes of the Subprime Mortgage Crisis
- Understanding the Foreclosure Process
- How to Avoid Foreclosure
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Comments
How funny! Instead of banks taking the hit for loans and credit they recklessly extended, the housing market and economy take it while banks make record profits on the backs of the taxpayers they hamstrung by the 2005 Bankruptcy Bill. Classic!
That’s why the bank regulation bill and the consumer financial protection agency are needed.
Over-spending and corruptive Wall Street are two major forces pushing the world to a recession.If we want to make democratic capitalism alive, instead of paving the way to socialistic governments,we have to spend less for at least 30 years.