16 Jan New Bankruptcy Law May Not Solve the Foreclosure Crisis?
Bloomberg reporter Jody Shenn’s recent article suggests that mortgage modifications in Chapter 13 bankruptcy – the subject of the proposed bankruptcy amendment â€“ may not stem the tide of foreclosures in this country. Well, Duh.
The new bankruptcy amendment allowing mortgage â€œcramdownâ€ requires that the debtor be in imminent threat of foreclosure. In other words, if a homeowner is scraping by, but nonetheless is staying current with the mortgage, he is not eligible for relief. Therefore, he must stop making mortgage payments and default on the mortgage to become eligible for cramdown.
Invariably, this country will see an INCREASE in default rates after the enactment of the new bankruptcy provisions, but this is not proof that cramdown is ineffective. To the contrary, because cramdown IS the solution to the collapsed housing market, average Americans will do what is necessary to become eligible for the program.
â€œBankruptcy cramdowns essentially tells [non-defaulted homeowners] that everyone else has been given leeway to abrogate those contracts,â€ says Glenn Boyd, head of U.S. asset-backed securities strategy at Barclays in New York. â€œThe concern is more people will walk away from their homes.â€
Judgmental words from a banker currently being bailed out by these same homeowners. Give me a break. Yes, we should all be good stewards of our money â€“ just like a bank.
As I Iâ€™ve argued previously, bankruptcy is a necessary market tool that prevents lenders from making bad lending decisions. It is only when the Bankruptcy Code allows exceptions for creditors that they begin to screw Middle Class America.
The problem with this proposed bankruptcy amendment is that it will not be applied to future home mortgages. So lenders, who have very short memories, will once again (Iâ€™ll say 10 years from now) speculate in a white-hot housing market, resulting in more 80/20 loans and 125% loans. Bankruptcy cramdown would prevent such improvident lending in the future.
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