over backward to help the credit industry while sticking it to working people who fall on hard times—was not the result of chance. Time and again, the Senate shot down amendments that would have made the bill less mean-spirited. Senators denied proposals that would have made it easier for military veterans, the sick, and the elderly to qualify for bankruptcy protection. They even rejected an amendment161 that would have put a 30 percent ceiling on the interest rates credit card companies can charge. Thirty percent—that’s more than your neighborhood loan shark charges.
According to the Institute for Financial Literacy162, in 2009, 9.1 percent of the people who filed for bankruptcy earned $60,000 a year or more, up from 4.7 percent in 2005. And among those who declared bankruptcy in 2009, 57.7 percent had attended college, an increase of 3.9 percent.
The institute’s executive director, Leslie Linfield163, also points out that there is an alarming bell curve for bankruptcy filings in the thirty-five to fifty-four age group. “Fifty-six percent of bankruptcy filers,” she says, “are in this age group. This is concerning because you are looking at a group of people who are middle-aged and very unprepared for retirement. As a society we can’t help but ask the question what will happen in twenty years when this group does in fact retire?”
Our elected leaders utterly ignored the fact that the vast majority of people who file for bankruptcy are middle-class folks who can’t pay their bills because they’ve lost their jobs or been hit with high medical bills. In fact, a 2009 study by researchers at Harvard164 and Ohio University showed that health-care problems were the root cause of 62 percent of all personal bankruptcies in America in 2007. Using that rate, roughly165 900,000 of 2009’s 1.4 million bankruptcy filings were medical bankruptcies. Or, to put it another way: Just over every thirty seconds someone in this country files for bankruptcy in the wake of a serious illness. How’s that for a shocking stat? Here’s another166: 78 percent of the so-called medically bankrupt had health insurance at the time of their illness. It just wasn’t enough to cover the dramatic rise in health-care costs.
Barry Bosworth and Rosanna Smart of the Brookings Institution167 found that the catastrophic collapse of the 2008 sub-prime mortgage market resulted in the disappearance of $13 trillion in American house hold wealth between mid-2007 and March 2009. Bosworth and Smart also found that “on average, U.S. house holds lost one quarter of their wealth in that period.”
The abrupt meltdown of the subprime mortgage and financial markets dramatically changed the lives of millions. Once-attainable goals like owning a home, achieving financial security, and being able to retire were suddenly out of reach. And, as we have not yet hit bottom, millions more may soon find their standard of living lowered—and their dreams of a brighter future dashed.
We are facing nothing less than168 a national emergency: 2.8 million homes faced foreclosure in 2009, and an estimated 3 million more are expected169 to be foreclosed on in 2010. If there was ever a middle-class Katrina, this is it. Yet even modest attempts to loosen the trap that snapped shut on so many have had a hard time getting traction in special interest– dominated D.C.
Take Senator Dick Durbin’s attempt to allow homeowners in bankruptcy a so-called cramdown, a means to renegotiate their mortgage with the bank under the guidance of a bankruptcy judge. Currently, mortgages are exempt from bankruptcy proceedings170. Until 1978, allowing cramdowns was standard practice. Subsequent court battles eventually eliminated their use171. The mortgage industry, not surprisingly, has been vehemently opposed to bringing the cramdown back. The banks scored a lopsided victory172 in late April 2009 when the Senate rejected Durbin’s measure, which would have helped 1.7 million homeowners keep their homes and preserved an additional $300 billion in home equity.
Given the tidal wave of foreclosures that so destabilized our economy, this seemed like a no-brainer. There had already been more than eight hundred thousand173 foreclosures in the first three months of 2009. But even after major concessions174 that diluted the bill, the Mortgage Bankers Association175 (whose members’ subprime schemes helped bring our economy to the brink), the Financial Ser vices Roundtable, and the American Bankers Association fought tooth and nail against it. And won.
Making matters worse is the fact that America’s banks and mortgage lenders are often so disorganized that people are being erroneously foreclosed on.
As ProPublica’s Paul Kiel reported176: “Sometimes the communication breakdown within the banks is so complete that it leads to premature or mistaken foreclosures. Some homeowners, with the help of an attorney or housing counselor, have eventually been able to reverse a foreclosure. Others have lost their homes.” Kevin Stein, associate director of the California Reinvestment Coalition, told Kiel, “We believe in many cases people are losing their homes when they should not have.”
You want an economic nightmare? How about a foreclosure bear trap that snaps shut on your leg even when you haven’t stepped in it?
YOU HAVE THE RIGHT TO AN ATTORNEY . . . UNLESS YOU’RE ABOUT TO LOSE YOUR HOUSE
America’s foreclosure crisis is being made even worse by the shortage of legal assistance available to beleaguered homeowners. According to a study by the Brennan Center177 for Justice, “the nation’s massive foreclosure crisis is also, at its heart, a legal crisis.” The vast majority of homeowners face foreclosure without legal counsel.
In New York’s Nassau County178, in foreclosures involving subprime or nontraditional mortgages (which are disproportionately targeted at minorities), 92 percent of homeowners did not have a lawyer. Having legal help can be the difference179 between families keeping their homes and being evicted. A lawyer can stop foreclosure proceedings or put enough pressure on lenders to convince them to rework the terms of the loan. A lawyer can also intervene in other ways, such as enforcing consumer protection laws or spotting legal violations by banks and lenders.
The barriers keeping homeowners from obtaining proper legal representation are twofold. The first is funding. In 1996, the bud get for the Legal Ser vices Corporation180, the primary agency that provides help for low-income Americans in civil cases, was cut by a third. At this point, to match181 the funding level the Legal Ser vices Corporation received in 1981 would require an increase of $753 million. If Goldman Sachs or Bank of America needed that kind of cash (or even ten times that kind of cash), Washington wouldn’t think twice. But low-income homeowners have no clout in D.C.
The second barrier is that restrictions182 to adequate legal help have been deliberately built into the system. Remember the 1994 “Contract with America”? It turns out that one of its provisions severely limited the ability of homeowners to get legal protection from predatory lenders. Homeowners represented by the Legal Ser vices Corporation are barred from bringing class-action suits. Nor are they able to make the other side pay attorneys’ fees, even when the law would normally allow it. The chance to recoup attorneys’