Will Bankruptcy Reform Increase Home Mortgage Interest Rates?
By Kent Anderson, Oregon Bankruptcy Attorney on Dec 24, 2007 in Benefits of Bankruptcy, Chapter 13 Bankruptcy, Consumer Protection, Mortgages
Proposed new bankruptcy legislation designed to help troubled homeowners will benefit consumers without hurting the industry. It would allow consumers with bad home loans to get help from the bankruptcy court. Lobbyists for big banks argue that granting bankruptcy courts the ability to modify home mortgage terms will increase interest rates. Adam Levitin, a Georgetown law professor, makes short work of this argument by looking at historical mortgage rates in parts of the country where this type of modification was allowed between 1981 and 1993 and comparing them to rates in areas where it was not permitted. He found no statistically significant effect on mortgage rates. His internet article on The Effect of Bankruptcy Reform on Mortgage Interest Rates also discusses the way home loans are underwritten as additional support for his analysis.
Why does this make sense? Prudent lenders make loans based in large part on the ability of the borrower to make payments and on the value of the collateral if the borrower defaults. The possibility of bankruptcy is only a small part of the analysis and the credit reputation of the borrower is the primary indicator used by lenders in making home loan decisions.
A change in current bankruptcy law to permit the court to adjust terms in usurious home loans with unmanageable interest rates would benefit the consumer and encourage lenders to offer modification to borrowers before they are forced into bankruptcy court. As for the rest of us, there should be no adverse impact on future borrowing. The prediction of increased interest rates appears to be nothing more than a lobbyist talking point.
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