Wednesday, January 14, 2009

Bad Mortgages - Another Tactic to Help The Economy

I have never liked the 2005 bankruptcy law. Let me be clear that the 1978 was not perfect but the "reforms" were not about correct defects but in making a "better" bankruptcy law. Better for whom? Some people in Congress thought that too many people were taking advantage of our federal bankruptcy law. I will not say Republicans - many Democrats signed onto the law. Including our Senator Bayh.

Rich Leonard is a Bankruptcy Judge who wrote Give Bankruptcy Judges the Power to Alter Mortgages for The Washington Post has some good ideas:
"More sophisticated than many borrowers, she realized she was getting an adjustable-rate mortgage. What she didn't realize was that, in the biggest 'bait-and-switch' ever pulled by an entire industry, her ARM was not tied to the prime rate or any other index, as adjustable-rate mortgages have traditionally been. Her rate simply adjusted periodically, ever upward. When it hit 14 percent, her social worker's salary could no longer cover the payments.

I watched this story unfold in court, from my seat in a bankruptcy judge's chair. While a Chapter 13 filing temporarily stopped the foreclosure on this woman's home, it did little more than buy a few months' time.

Under existing law, bankruptcy courts cannot modify the terms of home mortgages. To keep her home, this debtor needed to demonstrate sufficient income not only to make her ongoing payments at 14 percent but also to cover, during her five-year repayment plan, the payments she had defaulted on. Her proposed plan was clearly not feasible based on her salary, so I had no choice but to lift the stay and allow the foreclosure to continue.

Homeowners are the only ones who cannot modify the terms of their secured debts in bankruptcy. Corporate America flocks to bankruptcy courts to do precisely this -- to restructure and reamortize loans whose conditions they find onerous or can no longer meet. Airlines are still flying and auto parts makers still operating because they have used this powerful tool of the bankruptcy process. Lehman Brothers will surely invoke it. But when the bankruptcy code was adopted in 1979, the mortgage industry persuaded Congress that its market was so tightly regulated and conservatively run that it should be exempted from the general bankruptcy rules permitting modification.

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