Moody’s Economist Favors Bill for Home Mortgage Modification in Chapter 13 Bankruptcy

Moody’s chief economist surprised many today by testifying in favor of H.B. 3609, a proposal pending in Congress to change the bankruptcy law to allow for modification of home mortgage loans in chapter 13 bankruptcy.

Mark Zandi, chief economist for Moody’s and co-founder of Moody’s Economy.com testified before the U.S. House Judiciary Committee Subcommittee on Commercial and Administrative Law, giving what he said were his own personal views and not the views of Moody’s, a financial rating and information service.

Here are the six points of Zandi’s testimony:

“First, the nation’s housing and mortgage markets are suffering a very severe recession.”

“Second, residential mortgage loan defaults and foreclosures are surging and without significant policy changes will continue to do so through 2008 and into 2009.”

“Third, there is a substantial risk that the housing downturn and surging foreclosures will result in a national economic recession.”

“Fourth, without a policy response, mortgage loan modification efforts are unlikely to prove effective in forestalling the increase in foreclosures.”

“Fifth, the legislation to give bankruptcy judges the authority in a Chapter 13 to modify mortgages by treating them as secured only up to the market value of the property will significantly reduce the number of foreclosures.”

“Sixth, this legislation will not significantly raise the cost of mortgage credit, disrupt secondary markets, or lead to substantial abuses. Given that the total cost of foreclosure is much greater than that associated with a Chapter 13 bankruptcy there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise.”