Financial Predators
As talked about in an earlier post, the U.S. is in the midst of a massive housing bubble. California has been at the forefront of this, with many cities witnessing staggering price increases. Along with rising prices for middle-class and luxury homes, home prices in low-income minority areas have also been increasing.
Seeing this trend, many lenders have begun aggressive campaigns aimed at attracting new buyers in these areas. What they are selling is largely fictional - that home prices will keep rising and rising, and that one should borrow as much as possible now before it's too late.
“These people are being encouraged to take on debt they can’t possibly afford,” says Christopher Thornberg, senior economist from UCLA. “They are going to lose their home and what little life savings they have when this whole thing collapses and that’s just ridiculous.”
What has spurred this increase in predatory lending is the new bankruptcy laws going into effect October 17th. With the new changes, those who file for bankruptcy cannot have their slates wiped clean - they will still be on the hook for any debt they've accrued.
Take this simplified example: let's say a family buys a house for $300,000 on a currently popular adjustable-rate mortgage. At some point soon, interest rates will rise and increase monthly payments. If a family can't make the payments, the bank forecloses and takes the house.
The story used to end there - the bank took possession of the house and the loan was retired. The bank would then try to resell the house and recoup their losses. But the new bankruptcy laws take things one step further. Let's say the bank can only sell the house for $250,000 in post-bubble times. Now the family will still owe the bank $50,000 - the difference between the original loan amount and the revenue from the sale. And where will a family that couldn't keep up with their house payments find an extra $50,000? Nowhere - and they will struggle for years, if not a lifetime, to pay off this debt.
