Revised Bankruptcy Laws Triggers Real Estate Turmoil

November 16th, 2007

Washington Mutual had been demanding for an effective bankruptcy code that is revised to ensure that people can’t simply walk off from paying their credit card bills. Having established its forte as the largest U.S. savings and loan, it is clear that the company had been unable to foresee the possibility of a housing recession that would hit the real estate segment and send forth sparks of high foreclosures.

Most of the newly revised laws pertaining to bankruptcy boosted the foreclosures figures to break records because homeowners had no other option but to commit default on their pending mortgages in their desperation to pay off all the existing credit card debts.

Sadly, the devastation in real estate segment and increase in foreclosures can be pinned on Washington Mutual, Bank of America, JPMorgan Chase and Citigroup. These are giant corporates that spent somewhere around $25 million as part of effective lobbying strategy to press for revision of bankruptcy laws. The revision they sought was mainly to safeguard their own credit card profits but it obviously boomeranged and these companies are probably biting the dust for having brought this real estate chaos to absolute doom.

The rapid high surge in the number of foreclosures reduced severely the value of securities that were supported by mortgages. This resulted in devastating write downs of more than $40 billion for some of the best known names among the solid U.S. financial institutions. The top echelons of the financial services industry are now facing career burnouts too.

Charles Prince 3rd who had been the chief executive of Citigroup resigned just this week when the company had no other option left but to write down a sum of $11 billion for its third quarter.

Another banking baron, E. Stanley O’Neal had been forced to leave his position as chief executive of Merrill Lynch, which is highly reputed as the world’s largest brokerage firm. This was due to an $8.4 billion write-down.

Losses are spiraling out of control for most banks but the worst hit scenario is that new foreclosures in real estate soared to a record level for its second quarter. This was mainly due to severe defaults in the sub prime adjustable-rate mortgages. Again, the crux is that people are forced to prioritize their credit card payments ahead of their payments for mortgages.

This is because the revised bankruptcy law has toughened the act for debtors to qualify for bankruptcy under Chapter 7, which is the statutory section to enable non-mortgage debt. People are forced to walk away from their homes…thanks to credit cards of course.