The Senate is considering a bill introduced by Dick Durbin (D-Ill) that would allow bankruptcy judges to modify mortgages on primary residences. I am hoping that it will not get passed and here is why.
The whole reason bankruptcy judges haven’t been able to modify mortgages up to this point is so that lenders would be able to charge lower rates. One reason credit cards and auto loans have higher rates is because bankruptcy judges can modify them. This is just another way I will lose out on all these bailouts (taxes and inflation are others).
The bill will only incentivize people to stop paying their mortgage. Granted, a lot of people will continue to pay because they don’t want their credit ruined. On the other hand, you could get a judge to slash your mortgage in half and you get to keep your house. A lot of people will take the credit hit, keep their house and the extra cash rather than scraping by while making hefty payments on a house worth half of what it was when they bought it.
Next, foreclosures are helping to bring housing prices down. I think that is a good thing. They were at an unsustainable level. Preventing banks from foreclosing will only prolong the higher prices. Let’s get to the bottom already and work our way back up.
Some say the bill would be good because it will force banks to renegotiate loans. The incentives already exist. Banks would prefer not to foreclose. They don’t enjoy it and they don’t get a great return. Unfortunately, people are stupid and instead of going to talk to the bank, they just mail the keys to the bank and take off.
Perhaps the biggest qualm I have is that when the mortgages were entered into, the law said judges couldn’t touch the mortgage. The mortgage was bargained for with that in mind. I don’t like the government screwing around with bargained for benefits.
Last 3 posts by Taylor
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People watched the news as the government bailed out the banking industry. They watched as the government nearly bailed out the auto industry. Now they want their cut. After all, this is supposed to be a government “of the people, by the people, for the people.” So shouldn’t “the people” get their bailout? Sorry, that’s not what President Lincoln was referring to. You don’t help people by bailing them out of a home they can’t afford to live in. What does that teach them? Don’t think for a minute that these people and their children will be kicked out onto the streets. They will find a place to live…that they can afford. That’s it.
Bailing out the individuals will teach people to make stupid decisions and then wait for the government to bail them out. It won’t solve any of our problems.
I 100% agree with all of the above.
From the 1/9/09 WSJ - “Nearly 37% of homeowners whose mortgages were modified in the first quarter of 2008 defaulted again after six months, according to a report…” In other words, these bills won’t stop the bankruptcies.
I believe we’ll continue to see bills like this until there is a 10% drop in homeownership by Americans and we get back to the 60% average of the last 50 years.
What is so frustrating is that there are many, many people who are waiting to buy a home. And if the government just allowed all the troubled mortgages go into foreclosure, the people who have been waiting will buy. We’ll naturally get back to the historic average. It would just be a shift of who owns the homes.
The shift in who owns the home will mean that the responsible people who can afford the home will replace the irresponsible ones who couldn’t. Why should we try to stop that?