Mortgage issuers are finding out about the "Law of Unintended Consequences".

They asked for changes in the BK law. They got them in 2005. Two years later...they are finding out that people would rather pay someone else. This article from "Bloomberg.com" tells particularly of one sub-prime mortgage lender who is getting shafted a lot more recently:

Bankruptcy Law Backfires as Foreclosures Offset Gains (Update1)

By Kathleen M. Howley
©2007 Bloomberg L.P.. All Rights Reserved.

Nov. 8 (Bloomberg) -- Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.

The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts...said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin...

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

...The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions.

Securitization is common these days. However, those securitized loans can make it very difficult to "prove" the security interest in court. One judge in OH threw out fourteen foreclosure cases filed by Deutsche Bank recently because they could not prove even who owned the security interest for the loans. ( Case is posted here.)

[T]he 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... led by defaults in subprime adjustable-rate mortgages, according to the Mortgage Bankers Association in Washington.

How nice (NOT!). Get paid for unsecured debt...and get stuck with a lot of collateral in foreclosure?? That's what seems to be happening and is definetly unwelcome: Banks/mortgage issuers DO NOT WANT to be landlords!

Although, IMHO, this dark cloud may have, ironically, a silver lining as the insolvent homeowner comes to grips with the fact that money can only stretch so far and divestiture of an asset that has become a "White Elephant" may well be the best option:

`Let the House Go'

People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive officer of Capital One Financial Corp., 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, ...

It appears that the credit card companies are getting what they wanted since it's more difficult to qualify for CH 7 bankruptcy protection AND CH 13 plans do not take into consideration that adjustable rate mortgage do just that...and rarely in the direction of "down". Yes, the rate of CH 13 failures are not all that different than they were before (two-thirds of debtors not being able to complete the plan), but it appears the reason for the failure comes down to being able to pay the mortgage because the living allowances under the new BK law were really set up for the IRS for use in "Offers in Compromise" and not bankrupt debtors' reorganization plans.

And, this did not lower the rate of BK filings, either:

Bankruptcies Increase

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.

So, guess who found out about the "Law of Unintended Consequences"?

`Unintended Consequence'...

``The law had an unintended consequence of taking away a relief valve...'' said Rod Dubitsky, head of asset-backed research for Credit Suisse Holdings USA Inc. in New York. ``It's bad for the mortgage borrowers and bad for subprime investors because it means more losses.''

So, the lenders have some choices,none they wanted to see:

1.) Restructure loans so people can afford them without going BK.

2.) Have the BK law changed to allow for changes in mortgage payments.

3.) Or... avoid the problem in the future by being choosier about who they lend to to begin with even if it means they make fewer mortgages and more people have to rent for a longer period of time.
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1.) Bankruptcy Law Backfires as Foreclosures Offset Gains (Update1), Kathleen M. Howley, Bloomberg.com, November 8, 2007,© 2007 Bloomberg L.P.. Available here.

2.) "Unintended Consequences", Norton, Rob, 'The concise encyclopedia of economics', Copyright: Design and coding ©: 1999-2002, Liberty Fund, Inc. Content ©: 1993, 2002 David R. Henderson. Page available here.