U.S. Bankruptcy Law:

This has been republished by "Ralph Marcus Maupin Jr." "Mark Maupin" from Bloomberg News On how The US Bankruptcy Law has Backfire on Lenders, Banks and Mortgage Companies:
U.S. Bankruptcy Law:
Revisions Backfire on Banks
By Kathleen M. Howley Bloomberg News
Published: November 9, 2007



BOSTON: Washington Mutual got what it wanted in 2005: A revised bankruptcy code that no longer let people walk away from credit card bills.

The company, the largest U.S. savings and loan, did not count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record level as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School.

"Be careful what you wish for," Westbrook said. "They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures."

Washington Mutual, Bank of America, JPMorgan Chase and Citigroup spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a nonpartisan
Washington group that tracks political donations.

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion in write-downs for U.S. financial institutions. It also reached to the top echelons of the financial services industry.

The Citigroup chief executive, Charles Prince 3rd, stepped down this week after the company, the biggest U.S. bank by assets, said it might have $11 billion of write-downs on top of more than $6 billion in the third quarter.

E. Stanley O'Neal was ousted as chief executive of Merrill Lynch, the world's largest brokerage firm, after an $8.4 billion write-down. Morgan Stanley said Thursday that subprime losses would cut its earnings by $2.5 billion in the fourth quarter. It said it lost $3.7 billion in the two months through Oct. 31 as prices for securities linked with home loans to risky borrowers sank further than traders expected.

Even as losses have mounted, banks have seen their credit card businesses improve. The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp. In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the agency said. New foreclosures rose to a record level in the second quarter, led by defaults in subprime adjustable-rate mortgages, said the Mortgage Bankers Association in Washington.

People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive of Capital One Financial, the largest independent U.S. credit card issuer. Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards, he said. "What we conclude is that people are saying, 'Honey, let the house go,' " but keep the cards, Fairbank said Monday at a conference in New York sponsored by Lehman Brothers.

The new bankruptcy law makes it harder for debtors to qualify for Chapter 7, the section that erases non-mortgage debt. It shifted people who get paychecks higher than the median income for their area to Chapter 13, giving them as much as five years to pay off nonhousing creditors.

The court-ordered payment plans fail to account for subprime loans with adjustable rates that can reset as often as every six months, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. Two-thirds of debtors will not be able to complete their payback plans, according to the Center for Responsible Lending.

"We have people walking away from homes because they can't afford them, even post bankruptcy," Sommer said. "Their mortgage rates are resetting at levels that are completely unaffordable, and there's nothing the bankruptcy process can do for them as it now stands."
Four million subprime borrowers with limited or tainted credit histories will see their mortgage bills increase by an average 40 percent in the next 18 months, according to the National Association of Consumer Advocates in Washington. About 1.45 million of those will end up in foreclosure by the end of 2008, said Mark Zandi, chief economist at Moody's Economy.com .

Lenders began the process of seizing properties on 0.65 percent of U.S. mortgages in the second quarter, the highest level in the 35 years of Mortgage Bankers Association records.
Personal bankruptcies rose 48 percent to 391,105 in the first half of 2007 from a year earlier and Chapter 13 filings accounted for more than one-third of those, according to the American Bankruptcy Institute. In the first half of 2005, they were just 24 percent of the total.

Bad mortgages lowered Washington Mutual's profit by 75 percent in the third quarter from a year earlier, the company, based in Seattle, reported Oct. 17. But income from credit card interest rose 8.8 percent to $689 million.

Washington Mutual shares tumbled the most in 20 years Wednesday after the New York State attorney general, Andrew Cuomo, said that the company had pressured real estate appraisers to assign inflated values to properties.

Citigroup's earnings fell 57 percent in the third quarter on mortgage losses. Bank of America stopped so-called warehouse lending to mortgage brokers after its profit declined 32 percent in the period.

JPMorgan reported profit growth of 2.3 percent in the quarter, the smallest increase in more than two years, after reducing the value of leveraged loans and collateralized debt obligations, investment packages of mortgages, by $1.64 billion.

A Washington Mutual spokeswoman, Libby Hutchinson, a JPMorgan spokesman, Thomas Kelly, and a Bank of America spokesman, Terry Francisco, declined to comment on the bankruptcy law.

"The law had an unintended consequence of taking away a relief valve that mortgage borrowers used to have," said Rod Dubitsky, head of asset-backed research for Credit Suisse. "It's bad for the mortgage borrowers and bad for subprime investors because it means more losses."

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the biggest overhaul to the code in more than a quarter of a century. The previous law, adopted in 1978, loosened requirements for debt forgiveness.

Financial companies began a coordinated lobbying campaign for revising the law in 1998 when the American Financial Services Association, a trade group representing credit card companies, joined the American Bankers Association to form the National Consumer Bankruptcy Coalition.

Campaign contributions from the coalition and its members totaled more than $8.2 million during the 2004 election that gave President George W. Bush his second term in office.

The group, later renamed the Coalition for Responsible Bankruptcy Laws, has since disbanded. Its members included Washington Mutual, JPMorgan, Bank of America, Citigroup, MasterCard, and Morgan Stanley.