10.01.2008 0

Bankruptcy Ploy

  • On: 10/23/2008 10:04:06
  • In: Economy
  • ALG Editor’s Note: As ALG News has previously reported, Democrats are going to want to use the $700 billion bailout as an excuse to keep borrowers who have defaulted on their home loans in the houses they can no longer afford. And as illustrated by the following featured editorial, this is clearly not a good idea:

    Bankruptcy Ploy

    September 24th, 2008

    Apparently Democrats in Congress aren’t satisfied with the billions of dollars that will be required to clean up their Fannie and Freddie mess. As the price for passing Treasury Secretary Hank Paulson’s asset-purchase plan, Democrats are pushing a plan to make it easier for borrowers to renege on their mortgage payments yet still keep their home.

    As Senator Chris Dodd’s Banking Committee Web site explains it, “The only way to really help homeowners keep their homes is to allow borrowers to get the mortgages on their first homes reduced to the market value of those homes through bankruptcy.” This may sound like a great idea to troubled borrowers, but since taxpayers are increasingly now the lenders in these transactions, it will simply increase the cost of Mr. Paulson’s plan.

    The pain may be even more acute for those hoping to buy a home, if markets logically respond by setting mortgage interest rates closer to those on, for example, auto loans or credit cards. A bankruptcy judge is now free to reduce amounts owed on many types of consumer debt. For mortgages, the iron-clad requirement to pay off the loan or lose the house is precisely to encourage lower rates on a less risky investment.

    Justice John Paul Stevens described the importance of this principle in 1993 in Nobelman v. American Savings Bank: “At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual’s interest in retaining possession of his or her home than of other assets. The anomaly is, however, explained by the legislative history indicating that favorable treatment of residential mortgages was intended to encourage the flow of capital into the home lending market.”

    That’s why a group of moderate Democrats put up roadblocks in the House when Judiciary Chairman John Conyers wanted to move a broad “cramdown” bill last year. After much delay, his scaled-down version passed his committee but went no further. Even a financial crisis is no reason to enact a measure sure to increase costs for both taxpayers and borrowers.


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