U.S. Lawmakers Set New Mortgage Bankruptcy Bill

Lawmakers in Congress introduced a bankruptcy reform bill Tuesday that would allow bankruptcy judges to modify home loans (dubbed as "mortgage cram-down") in the same whey that they currently may modify other unsettled obligations, such as credit card debt. The bill, titled "Helping Families Save Their Homes in Bankruptcy Act", was introduced in the Senate by Sen. Durbin and in the House by Rep. Conyers.


While the housing market downswing continues, some in the housing industry have warned that it is the wrong time to write long-lasting mortgage rules. Credit markets swing like a pendulum, so if you accept that credit was way too easy a few years ago, there is probably too little credit today as the credit market overreacts. A top lobbyist for the Mortgage Bankers Association, Francis Creighton, stated in an article by Patrick Rucker posted on reuters.com, that "Cram-down would lock the pendulum at an overly restrictive point." Foes of the plan argue that it would wrongly invalidate mortgage contracts and raise future costs of borrowing. The lending industry has said that allowing bankruptcy judges to modify mortgage obligations would change how lenders weigh risk (i.e, you either won't get the loan or the lender will charge you a whole lot more for it).


Consumer advocates, though, argue that the plan to give homeowners protection in bankruptcy is a natural extension of current law and urgently needed to stem foreclosures.


While no one has a crystal ball to foretell the future, there may be some truth to concerns stated by opponents to the plan. One of the reasons credit card rates are significantly higher than the interests rates one pays for a mortgage is the fact that credit card debt is unsecured and can be modified by the bankruptcy court. If mortgage debt is treated no differently than unsecured debt, borrowers' ability to qualify for a mortgage will likely remain more difficult and the cost of the mortgages will be higher.


However, with the mortgage crisis becoming more severe, every possible solution will likely be on the table and I would not be surprised if opposition to cram-down or other solutions wilts. According to an article posted today on the News Daily web site, the National Association of Home Builders has dropped its opposition to the plan and the National Association of Realtors is debating whether to end its opposition.

We can only hope that the law of unintended consequences doesn't apply.