The Bush Administration: the gift that keeps on giving

With the tax cuts, wars, regulatory failures, Katrina, US Attorney scandals, and so on, I thought I had a complete picture of all of the disastrous policy decisions that were made by the Bush Administration. Ah, but I'd forgotten about the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Thinking back to those halcyon days, I recall that the BAPCPA seemed to me a gratuitous slap at consumers by the financial industry (and their tools in Congress and the Bush Administration). Consumers are running up huge balances on their credit cards, said the big credit card issuing banks. Let's make it more difficult for them to squirm out of these debts if they ever get in over their heads (not "let's stop sending 15 year olds multiple credit card offers with teaser introductory rates," but rather "let's make sure they're totally screwed if they keep taking the money we're sending them").

So the BAPCPA changed the bankruptcy laws to tighten restrictions on who may file for Chapter 7 bankruptcy. If I declare Chapter 7 bankruptcy, my credit card and other unsecured debt is discharged, freeing money up so that I can continue to make payments on secured debt like my home mortgage. The BAPCPA prevented people whose pre-bankruptcy income exceeded the state median from declaring Chapter 7 bankruptcy and imposed other impediments. As a result, more people who declare bankruptcy now must do it under Chapter 13. The key difference between Chapter 13 and Chapter 7 is that when I file under Chapter 13 I must continue to pay off my credit card debt, which means that I have less money available to keep up with my mortgage.

Hmm, I wonder if the BAPCPA increased the number of homes under foreclosure due to the more stringent treatment of credit card debt? Well, it turns out that Donald Morgan, Benjamin Iverson, and Matthew Botsch at the New York Fed have run the numbers. What did they find?

The estimated impact of BAR on subprime foreclosures is substantial. For a state with average home equity exemptions, the average subprime foreclosure rate over the seven quarters after BAR was 11 percent higher than the average rate before BAR. This translates to about 29,000 more subprime foreclosures nationwide per quarter attributable to the reform.

And in a footnote:

BAR may have indirectly contributed to foreclosures via lower home prices. To the extent that cash-flow-constrained borrowers were forced to sell their homes in lieu of filing Chapter 7, the downward pressure on home prices would contribute to foreclosures by leading to underwater” mortgages.

Oh, the creative ways the banks and Republicans find to screw up our economy never ceases to amaze me.