Tuesday, January 27, 2009

Opinions Diverge: Should Bankruptcy Judges Be Able to Modify Home Loans?

In today's New York Times' "Economix Blog," economist Edward Glaser delves into the foreclosure crisis and takes readers through a number of tactics up for debate right now about how to solve the problem. Among the possible solutions Glaser highlights is giving bankruptcy judges the responsibility of rewriting mortgage terms. Glaser disagrees with this approach, opining that "handing [this] process over to the judicial sector is a cop-out that will create more chaos than clarity."

While Glaser may disagree with this approach, several leading affordable housing leaders and advocacy groups support judicial modifications, as home loans are the only type of loan that is currently prohibited from modification in a court room. Michael Calhoun, president of the Center for Responsible Lending, recently testified before the Senate Judiciary Committee in November about the need for judicial authority when it comes to loan modifications for homeowners facing bankruptcy, saying:

Today's bankruptcy law specifically bars courts from modifying just one class of loans and one type of asset—home loans that are a family's primary residence.

This makes no sense: A home is by far the most important asset a family owns. Bankruptcy courts can modify loans on corporate real estate, investor properties, the primary residences of farmers, and rich families' second or third homes. Why should the primary residence owned by an average citizen be excluded?

In addition to this, Citigroup, Inc. recently dropped its opposition to giving bankruptcy judges the right to change the terms of mortgages, signaling to legislators that action such as this must be taken in these dire times.

Most recently, this discussion has continued to unfold in the House Judiciary Committee. The committee held a hearing last week on bankruptcy legislation introduced earlier this year by Committee Chairman John Conyers (D-MI). This bill, H.R. 200, is entitled the "Helping Families Save Their Homes in Bankruptcy Act of 2009" and would amend bankruptcy provisions to allow homeowners to write down their primary residence in order to modify their mortgage.

American Banker reports that the committee will vote later today on this crucial legislation.

If nothing else, the healthy debate over which tactic would best mitigate the current foreclosure crisis is a starting point from which we can all come up with a compromise to benefit who matters most: the struggling homeowner.

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