YBK [Part 15]: The nation's paper of record finally reports on the bankruptcy boom that began with the passage of the new law. What's interesting about the NY Times article is that it indicates that the states where filings have gone up most dramatically are those that have been untouched by the Housing Bubble, like Idaho, Indiana, Ohio, Texas and Utah. Residents in those states can't stave off the debt collector when times are tough by borrowing on the equity of their home, so they often have no choice but to file.

The YBK trouble will occur when the bubble begins to burst elsewhere, in states like California, Massachusetts and New York. As one of the Volokh Conspirators notes, 61% of all new mortgages in California are interest-only, no-money-down deeds of trust, where the borrower agrees to incur a sizeable debt on their home in the expectation that they will be able to refinance or sell at a higher price down the line, before monthly payments at a prohibitively higher level kick in. If they are unable to do that, the borrower has two options: either file a Chapter 13, and try to repay the arrearage over a period of time, or simply default, and allow the lender to foreclose.

The result is scary to think about. Lenders, who are limited to what they can recover in a foreclosure to the actual value of the property plus costs, will lose their figurative shirts. Fannie Mae and Freddie Mac, which exist to alleviate the burden for low and middle income borrowers to buy a house, could collapse, requiring a massive government bailout that will dwarf the S&L bailout in the '90's. Unsecured creditors, like the credit card companies that so aggressively lobbied Congress to pass its wish-list, will see a lot of their loans vanish in bankruptcy, especially non-delinquent accounts. And for homeowners, the expectations that were generated by the steady, dramatic rise in home values may make the fall especially galling. We might be staring into the abyss if the bubble begins bursting before October 17.