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Homeowners find bankruptcy fails to prevent foreclosure
By Lingling Wei
April 12, 2007

NEW YORK --More financially stretched borrowers are realizing that even declaring bankruptcy can't save their homes from foreclosure.

Take, for example, Bernice and Harlan King in Cleveland. The couple, saddled with $30,000 in credit-card and other debts and behind on their $1,650 monthly mortgage payments, filed Chapter 13 late last year to prevent their mortgage lender from repossessing their house. Their hope was to work out a plan to catch up with the mortgage payments and repay other bills over three to five years. Now they are giving up, and their house is heading for foreclosure. "It's just too much trying to catch up," said Bernice King, 48, a local court stenographer.

The Kings and people like them present a worrisome trend for investors already spooked by soaring delinquencies and defaults on home loans to people with the weakest credit. According to a study released in March by Credit Suisse Group, more subprime borrowers are turning to bankruptcy court to stave off foreclosure, as softening housing prices make it harder for them to sell their homes to repay debts.

At the same time, the study shows, the number of borrowers actually able to bring current their mortgage payments through bankruptcy is declining, and more filers are ultimately turning their homes over to the lenders. The finding means investors in high-yielding mortgage-backed securities should expect higher losses on the underlying collateral.

At least part of the reason, says the report, lies with the bankruptcy law passed in October 2005. The law raised the bar for people to qualify for Chapter 7 "fresh-start" bankruptcy proceedings. Chapter 7 helps individual filers to wipe away debts such as credit-card and medical bills so they can continue to make their mortgage payments. With access limited, more subprime borrowers are forced into Chapter 13, where some can't maintain their payment schedules for more than a couple of months.

The Kings, for example, had thought about filing Chapter 7, but made too much money to pass the new bankruptcy law's means test, said Harlan King, an airline baggage handler.

"It's become harder to file for Chapter 7 to release debt burdens," said Jay Guo, a director in Credit Suisse's asset-backed securities research group in New York and the lead author of the study. "Going forward," he added, "delinquent loans are more likely to go into foreclosure directly rather than into bankruptcy," resulting in higher losses for mortgage-bond investors.

First American CoreLogic, a provider of real-estate information, expects to see 1.1 million foreclosures nationwide over the next six to seven years as a result of jumps in monthly payments on adjustable-rate mortgages made from 2004 through 2006.

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