By supporting legislation that would have changed the bankruptcy code to allow homeowners facing foreclosure to modify mortgages in bankruptcy, says New York Times Op-Ed writer Joe Nocera.
“… Thanks to a 1993 Supreme Court decision, homeowners saddled with mortgage debt on their primary residences have not been able to take refuge in the bankruptcy courts,” Nocera writes in today’s NYT. ”The unanimous ruling by the court found that when Congress rewrote the bankruptcy code in 1978, it specifically gave “favorable treatment” to mortgage lenders “to encourage the flow of capital into the home-lending market,” as Justice John Paul Stevens wrote in a concurring opinion. (Illinois Senator Dick) Durbin was trying to get rid of that favorable treatment.
“Why? Because, as Bair told me in an email, “It would have been a powerful bargaining chip for borrowers.” Without the ability to file for bankruptcy, underwater homeowners unable to pay their mortgages were helpless to prevent foreclosures. With it, however, servicers and banks were far more likely to negotiate the debt load. And if they weren’t, a bankruptcy judge would rule on the appropriate debt to be repaid. For all the talk about the need for principal reduction, this change would have been the easiest way to get it.”
It would have been tonic for lenders, too. Knowing they could push people into bankruptcy, where they’d get a haircut, they would have been less likely to write risky loans.
Instead of supporting this legislation, Obama just checked out of the mortgage issue. He let Stockton languish.