Mortgage Modification Bill: Mortgage Bankers Don’t Get It

Pending bankruptcy legislation would allow bankruptcy judges to modify mortgages in Chapter 13 in order to slow down the foreclosure crisis in this country. Mortgage bankers oppose the bills even though it could ultimately benefit their industry.

Today, they rolled out former Republican Congressman Dick Armey in the Wall Street Journal to attack former Republican Congressman Jack Kemp’s support for the proposals. Armey’s attack boils down to the old saw that, gosh, if you allow people to pay back less than they owe on contracts then it might possibly become more expensive or more difficult to borrow that way for other people.

My friend Kent Anderson has already written eloquently about the independent experts who show that these assumptions are not true. And of course it’s not allowing them out of part of a debt that causes the loss — it’s the consumer’s inability to pay it. If Armey has a way for everyone to pay back their debts regardless of circumstance, then I have missed his name on the ballot for President for Life. He would win.

Sadly, Armey and the mortgage bankers are foisting on the public the idea that, somehow, most troubled borrowers would get loans but for bankruptcy modifications — an ideal which is no longer true unless you qualify for direct or indirect government guarantees of your loan, or you have near-spotless credit and/or substantial equity.

Opponents of these bills really care about their profit margins. They supported bankruptcy “reform” for the alleged purpose of saving American consumers a purported $400 each in higher borrowing costs. I’m still waiting for my $400 check, how about you? In fact, as Elizabeth Warren notes, the cost of credit actually increased after reform. In other words…they kept your $400 check and charged you more instead.

Mortgage loan investors will ultimately save more through modified mortgages than they would recoup from foreclosing and selling in a falling real estate market. If they can sell. But the industry that originates, re-sells, packages, securitizes, refinances, and eventually forecloses on these loans would be cut out of the profit loop. A lot of those folks are “mortgage bankers” or their allies (like former politicians).

And you wonder why they oppose the very idea?

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