by Calculated Risk on 11/07/2006 12:33:00 AM

From the AZ Central: A growing burden of home debt

Credit counselors are finding that mortgage debt is playing a bigger role in the deteriorating financial health of consumers contemplating bankruptcy.
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[Susan C. Keating, chief executive of the National Foundation for Credit Counseling] said ... many counselors reported that their clients were delinquent on their mortgages, with some reporting that 100 percent of their clients were delinquent.

The organization's counselors ... had reported a brisk increase in the number of clients who are concerned about the rising costs of their adjustable-rate mortgages in particular, she said.
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"Mortgage debt is coming out as much more significant than we expected," Keating said. "Pull this all together with the other unsecured debt people have, and this is really problematic."
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But according to Craig Focardi, an analyst with TowerGroup, a financial industry consulting firm, federal bankruptcy laws passed last year could also help make it less likely that banks will push for foreclosures when consumers become delinquent with mortgages.

Focardi said that under the new bankruptcy law, secured creditors like mortgage lenders "have to share more of a debtor's income with credit card, automobile, and other consumer lenders that hope to increase collection recoveries" in a bankruptcy proceeding.

As a result, Focardi said, mortgage lenders are more likely to help consumers stave off bankruptcy by setting up payment recovery plans, because they may stand even less of a chance of getting repaid if the consumer declares bankruptcy now than they did under the previous laws.

"Under the new law it's harder for borrowers to file Chapter 7, which enables them to extinguish their debt," Focardi said. "Instead, they have to set up repayment plans even for credit cards. So it lengthens the amount of time borrowers are delinquent on their mortgages and could increase the lender's total loss on that defaulted loan."