One in eight US homes is at risk of foreclosure, and the mortgage bankers continue to block a remedy that costs the tax payers nothing. I continue to marvel that the very folks who created this crisis by making utterly foolish loans have any credibility on Capitol Hill. Maybe their money continues to talk persuasively.
Conservatives preach that permitting mortgage modification in bankruptcy violates the sanctity of contract. Hello? Bankruptcy is all about the rights of the parties when a contract is breached. This is nothing new. Prof. Levitin points out that a contract need not be a suicide pact.
Bankruptcy doesn’t create financial failure; imposes rules and structure on the consequences of failed finances (personal or corporate).
Bankruptcy is no one’s preferred choice: watch the auto industry trying to avoid it. But rejecting a bankruptcy remedy will not staunch the bleeding in neightborhoods gutted by foreclosures. Certainly, there is no evidence that the lenders are willing or able to craft a solution in voluntary negotiations with borrowers, even assuming borrowers have any partity at the negotiating table.
The most often repeated reason to reject judicial modification is that “it will increase the cost of future loans.” That’s what the realtors of Silicon Valley believe. They cannot have read the bills introduced in Congress which limit modification to loans in place before 2009. There is nothing in S. 61 which will have any impact on the pricing of future home loans.
What is the cost of doing nothing? Judicial mortgage modification allocates the cost of a fix between the borrower and the lender or the lender’s successors. No taxpayer money involved.
The disputes among economists about the preferred approach to our wider financial debacle seem pretty much confined to just how big the sum of money required to get us back on track, not whether the government should intervene. It is a time for new thinking and targeted new approaches to the housing component of the problem. Just providing money and tax breaks for those who buy foreclosed houses seems a callous and backward approach to waves of foreclosures.
But judicial modification isn’t even that radical; it exists for every loan but the ones that count in our economy, the home loan. It’s time to repeal the special interest legislation that protects home lenders from economic realities in bankruptcy court. Or the banks will own even more real estate than they do now, and families and neighborhoods will lose.