Mortgage Modifications and Bailouts

As the law stands now a claim secured only by a security interest in real property that is the Debtor’s principal residence may not be modified in a Chapter 13 Bankruptcy.  Debtors’ attorneys have argued since the foreclosure crisis began that allowing debtors to modify their mortgages in a Chapter 13 would go a long way to resolve the problem.

A Chapter 13 Bankruptcy format gives the ability to reduce the principal balance down to the value of the property and reduce the payment accordingly.  At the mere mention of this proposal banks scream bloody murder.  So, when faced with a $700 Billion bailout; you would think that this idea would make more sense.  After all, this would write the mortgages down to the value of the collateral (which is a lesson in valuation we supposedly learned in the S & L mess) and turn a non-performing asset into a performing asset and an income stream to boot!

So, it shouldn’t come as any great surprise that this issue has raised its head again on Capital Hill this week.  The banks are still screaming bloody murder.  It really gives me pause (well, frankly, several things about this bailout give me pause, this is just one of them) when banks scream this loudly about a solution that seems to make this much sense.  Oh, wait a minute, free money is always better.

Sorry.  Not when I am paying the bill.

Write your Congressmen.  This bailout needs accountability, it needs limits, it needs oversight, it needs to be limited to certain kinds of collateralized debt (as of this morning the Treasury wanted to be able to include debt secured by credit cards, car loans and student loans as well — sorry, $700 Bn isn’t even a good start at that point).  It also needs a modicum of sense.  Using the existing Chapter 13 structure to create performing assets is a good start.


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