Business forum: Credit industry led to bankruptcy filings

In 2005, the credit industry sought, and Congress delivered, a bankruptcy reform bill that is now the law of the land.

Reform advocate Todd Zywicki, a law professor at George Mason University, said the bill was aimed at "rebalancing the system by targeting the worst forms of fraud and abuse in the system."

No matter that consumers file bankruptcy because they are broke. In 2007, 36 percent of disposable income went to food, energy and medical care -- the largest percentage since such statistics were first recorded in 1960.

So while the government was targeting bankruptcy filers, the credit industry turbo-charged profits with predatory mortgages, usurious interest rates, fraudulent appraisals and false promises. It is small comfort that Treasury Secretary Henry Paulson last week proposed the biggest regulatory overhaul of the credit industry since the Great Depression. The damage has been done.

Let me back up. I am an attorney practicing consumer bankruptcy law. I have represented thousands of clients. A quote from a recent client -- let's call her Joanne -- serves as a useful backdrop: "I thought I had a house, and now I am afraid I am going to lose it, and I don't know why."

Her wistful expression, distant eyes and brilliant observation give veracity to a powerful truth: While the government enforcement apparatus was focused on debtors, the credit industry had a criminal Mardi Gras of a party. The resulting hangover is described by Jane Bryant Quinn as "the most significant financial crisis we've had since the 1930s." Let that soak in for a moment.

Joanne did nothing wrong. She is a single mother. Someone told her she could have the American dream, a home of her own in which to raise her daughter. But no one adequately explained the small print.

Nobody explained to her that, with her child-support income and waitress job, she couldn't afford this mortgage -- especially with the predatory features built into it. Nobody explained that her mortgage payments would increase by leaps and bounds. Nor did anyone explain to her that in foreclosure, she would lose her American dream, her money, her credit and her false hopes that she could be a homeowner.

Home purchases are an engine of productivity for the rest of our economy -- when a house is bought, sales of utilities, appliances, furniture, household goods and furnishings and other necessities increase. So the mortgage bust has spread its unstable tentacles throughout the economy.

Joanne, and the thousands like her who were sold a fraudulent dream, did not cause the current credit crunch.

No. The fingers should be pointed at credit-crunch originators like Bear Stearns -- the country's fifth-largest investment bank and a big player in subprime securities. Bear Stearns agreed to be sold to J.P. Morgan Chase at a steep discount in order to avoid declaring bankruptcy.

Think about that: Bear Stearns and Federal Reserve Chief Ben Bernanke, who orchestrated the Bear bailout, were worried about filing bankruptcy. Folks, you can't make this stuff up!

Nine million American households have negative equity in their homes. According to Merrill Lynch, aggregate mortgage debt exceeds aggregate homeowner equity by $836 billion. Fraudulent lending practices have resulted in a plunge in home equity.

But the worst offense is that the dream of home ownership was cynically offered. And then it was ripped away. Millions of Americans and their children are learning a bitter lesson about greed.

I don't have any answers. I wish I did. I am just a lowly bankruptcy attorney with a ringside seat to the destruction of our economy.

In so doing my breath has been taken away as the powerless are beaten up by the powerful. Bankruptcy clients are badgered at hearings; they are the subject of burdensome document requests and are dogged by technical and formulaic objections. They are required to prove the negative -- to rebut the presumption that they are dirty rotten scoundrels.

This while the powerful are destroying our economy right before our very eyes. The system focuses on petty misdemeanors while creditors loot and defraud. And the creditors control the cops, who have a zero-tolerance policy toward the debtors.

Of course bankruptcy filings must be enforced. But regulatory and enforcement efforts should be equitably balanced. If the effort put toward debtor policing was matched by an effort to ensure sound lending practices, we would not be in the economic mess we are in.

It will get worse before it gets better. The Wall Street Journal says that interest rates on $362 billion in subprime adjustable-rate mortgages are scheduled to increase in 2008. In 2009 and 2010, rates on an additional $950 billion worth of these mortgages will reset.

So the fox has had its way. There is blood on the henhouse walls. But we are safe from Joanne.