The adjustable rate mortgage mess is with us: no amount of pussyfooting about whether a legislative change is necessary will make the problem vanish. The choice we have is whether we sit back and let hundreds of thousands of homes be foreclosed or whether we give bankruptcy courts the tools to soften the impact of the crisis.
Currently, the only mortgage that a bankruptcy judge cannot alter is a home mortgage; mortgages on vacation homes, apartment buildings, and commercial property can all be modified in bankruptcy. The ability to modify these mortgages in bankruptcy does not seem to have ruined the credit markets to date.
A provision of the bankruptcy code, inserted to encourage the home lending industry years ago, now ties the hands of a bankruptcy alternative to massive foreclosures.
If bankruptcy judges were empowered to write mortgages down to the value of the property when the case was filed, and alter the terms, within a Congressionally mandated standard, both homeowner and lender would benefit. The homeowner gets a shot at keeping his home and paying for it, based on today’s values; the lender gets just what he would get if he foreclosed: a house now worth less than the value at the inception of the loan. Plus the administrative costs of restructuring the mortgage have got to be less than either staffing an n house mortgage modification operation or foreclosing, maintaining and trying to sell the foreclosed house.
The only cost here to the taxpayers is perhaps some more court clerks for the bankruptcy system. We don’t bail out the lenders who made foolish (or deceptive) loans; we don’t provide amnesty to the borrowers who at best were overly optimistic, and at worst were sold snake oil that puts their homes at risk.
Surely, permitting the modification of home mortgages has to be a better solution than neighborhoods of empty, bank owned houses, and displaced families. Because that certainly seems to me to be the alternative.