Marianne B. Culhane

For seventy years, homeownership has been an important indicator of middle class status and a central focus of public policy. Recently, however, homeownership has morphed from the American Dream into a nightmare for many homeowners. High loan to value mortgages, adjustable interest rates, option payment amounts and home equity loans have left many homeowners with high mortgage debt to income burdens and little or no home equity. By 2007, when home values began to plummet and unemployment to rise, even fixed rate first mortgages on many home were underwater. Homeowners could not refinance or sell homes for enough to pay off the debt, nor could they keep up the ongoing payments. Lender intransigence and complex securitization rules too often prevented mortgage modification.|Increasingly, homeowners desperate to save their homes turn to bankruptcy courts for help. However, bankruptcy courts cannot reduce the principal amount on home mortgage loans. At most, bankruptcy can delay foreclosure and allow time to cure defaults. For many debtors, this limited relief is too little, too late: they still lose their homes.|In the 2007 CBP sample, 55% of the cases were filed by homeowners. Ninety percent of those debtors hoped bankruptcy would let them keep their home. For many, however, those hopes were soon dashed. Phone interviews in spring 2008 showed that debtors in more than one in four chapter 7 cases had lost their home after their case was filed. Sample chapter 13 debtors fared a little better. That chapter supposedly was designed to help homeowners, but even there, a year after filing, more than one in ten homes had been lost. And that's not the final tally for home loss in chapter 13. Since those cases last up to 5 years and have a low success rate, many more chapter 13 debtors may have lost their homes after they were interviewed.|The consequences of home loss are hard. Debtors and their families of course suffer most. They must move away from familiar, safer neighborhoods, often into areas with higher crime rates. Children are torn from the friends and schools they know. Finding affordable rental space is especially difficult for families with several children. Foreclosures and vacant homes drive down property values, so the neighborhoods debtors leave behind also suffer financially. Cities and towns lose tax collections and become less able to provide needed services. Lenders lose as well, for they recoup less and less from foreclosures as property values fall.