Opponents to legislation to allow bankruptcy judges to modify home mortgages scream that such a prospect would raise the cost of everyone’s home loans in the future. If contract isn’t sacrosanct, they argue, lenders will have to raise the interest rate to cover the risk. Pretty scary stuff, if true.
But the claim is wrong on two scores. First, the bill reported out of the House Judiciary Committee applies only to loans on the books when the law is enacted. It will have no application to loans made in the future.
Second, an academic study last year looked at the impact of bankruptcy loan modification in the period when it was permitted and found very slight impact on interest rates. “Mortgage markets are largely indifferent to the risk of bankruptcy modification.”
Remember that the risk of judicial modification already exists for lenders on vacation homes, rentals, and commercial buildings. Those credit markets seem to have survived and prospered (before the current debacle) in the face of possible modification.
Then, I suppose, we have to ask what is the cost to future homebuyers if we don’t stop the collapse in the housing market.
