WASHINGTON — Economists at the New York Federal Reserve have concluded that a controversial 2005 law backed by banks and credit card companies pushed more than 200,000 people into foreclosure and exacerbated the subprime mortgage crisis.
Consumer advocates fought hard against the law, which made it much more difficult for individuals to alleviate credit card debt in bankruptcy. This inability of homeowners to eliminate other debts, the New York Fed economists conclude, in turn made borrowers unable to pay off their mortgages, spurring foreclosures.
Despite opposition from public interest groups, the 2005 law easily cleared both chambers of Congress and was signed into law by President George W. Bush. In a paper released Tuesday, New York Fed researchers Donald P. Morgan, Benjamin Iverson and Matthew Botsch determined that the law sparked about 116,000 additional subprime mortgage foreclosures a year after going into effect.
What’s more, they note, these foreclosures pushed home prices down, which may have lead to additional foreclosures. When the value of a home drops below what a borrower owes on the mortgage, it becomes nearly impossible to get out of the loan by selling the house or refinancing, making foreclosure more likely if they become unable to afford the monthly payment.
“By making it harder for borrowers to avoid paying credit card debt, [the 2005 bankruptcy law] made it more difficult for them to pay their mortgages, so foreclosure rates rose,” the economists wrote.
Although borrowers have been unable to alleviate mortgage debt in bankruptcy since 1993, they remain able to discharge credit card debts by filing for bankruptcy. But the 2005 law made it much more difficult for consumers to file for bankruptcy at all — and then limited their ability to reduce credit card debt burdens once they did.