The United States Congress is currently considering legislation that would allow bankruptcy judges to rewrite some of the terms of a mortgage to reflect the value of a homeowner’s property and the current mortgage investment climate. My colleague Wendell Sherk of the Bankruptcy Law Network notes the following about the legislation currently before Congress:
The legislation now pending in Congress would allow homeowners in Chapter 13 to rewrite their mortgages to reflect current market value with market interest rates for the long haul. In other words, it asks the investors to take a small loss to avoid a bigger one. The investor still has a lien on the debtor’s home and has the remaining investment protected from inflation by a market rate of interest. The investor doesn’t have to absorb the costs of foreclosure or the added losses from a fire sale real estate market. The mortgage servicer gets a performing mortgage in the portfolio again, although it loses all those additional fees it would charge for processing the foreclosure.
Traditionally, the Chapter 13 process has allowed debtors to rewrite the terms of credit card lenders, vehicle lenders, furniture lenders and pretty much every other kind of lender – except mortgage lenders. Perhaps it is time for mortgage lenders to become full participants in bankruptcy. Is it possible that the many abuses we see from the mortgage industry arise from their special status?
As a proponent of the free market, I have some concerns about empowering bankruptcy judges to rewrite mortgage loans. Such a change will impact the mortgage markets – good, bad or indifferent and no one knows exactly what such a change would mean. On the other hand, mortgage lenders have brought this rather significant change upon themselves with a litany of questionable and abusive practices:
- teaser rates
- balloon notes
- interest only loans
- negative amortization
- lack of tranparency with fees
- unexplained fees, costs and charges
All this brings to mind the observations of Robert Peroni, my tax law professor at Tulane Law back in the early 1980’s – greedy people lead to the enactment of bad law. Professor Peroni was fond of noting that attempts by wealthy doctors to shelter income from taxes led to the closing of otherwise legitimate tax shelters. I think that the same process is at work here.