Housing Crisis Caused By 2005 Bankruptcy Law

The 2005 bankruptcy “reform” law was really about abuse of consumers and protection of banks.  Its lofty name “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” was no vehicle for consumer protection.  I have long felt that this effort to make consumers more “responsible” financially has contributed to the dramatic economic downturn we have experienced.  The negative publicity surrounding passage of the bill in April of 2005 caused a rush to the courthouse for many consumers.  The abrupt dropoff in filings after the effective date in October 2005, made it clear this legislation had a significant impact on the economy.

If scaring consumers by taking away some of the protection afforded by the bankruptcy laws makes them more responsible, it also seems to have contributed significantly to home loan defaults.  It makes sense.  Consumers have limited resources.  When they must dedicate more to payment of credit card debt, they have less money to pay their home loans.  Now, there is a study that documents that result.

A new paper written by three economists, Wenli Li of the Federal Reserve Bank of Philadelphia, Michelle White of the University of California San Diego, and Ning Zhu of the University of California, Davis, takes the position the 2005 bankruptcy legislation is a significant factor in the mortgage crisis and the recession it caused.  The abstract of this article is published by the National Bureau of Economic Research under the title Did Bankruptcy Reform Cause Mortgage Default to Rise?  It promotes the paper as arguing that “an unintended consequence of the reform was to cause mortgage default rates to rise.”

After looking at a large number of individual mortgages, the authors conclude that default rates increased by 14% in prime mortgages and 16% in subprime mortgages after enactment of the new law.  They find that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 caused an increase in home loan defaults of approximately 200,000 per year.

You can thank those corrupt senators and congressmen who took millions in campaign contributions from banks, credit unions and other consumer lenders for bringing on the recession we struggle with today.  However, in all honesty, it is the live for today attitude of most first world consumers that is the root of our problems.  The voters elect politicians who promise to lower taxes and increase spending.  These same voters expect public benefits to increase but are unwilling to pay the price for this largess.