Bankruptcy

Let Them Eat Crumbs

By Elizabeth Warren

The Treasury Department has yet another voluntary plan to fix the mortgage meltdown.  This one gives families an extra thirty days to pack their belongings before they lose their homes to foreclosure.  For the 2 million families estimated to go into foreclosure this year, the mortgage industry, backed by the current administration says, in effect, "Let them eat crumbs."

The administration plan is, once again, voluntary, and only a half-dozen lenders have agreed.  What about the teaser-rate and sleaze-ball mortgages sold by everyone else? I guess those home owners had better pack fast.

The mortgage lenders are hailing the extra 30 days as "stopping foreclosures" and giving time to negotiate new loans.  But there are no commitments in that rhetoric. Indeed, this is described as valuable for people who are already 90 days in default--and with whom the mortgage servicer didn't work something out during that time. 

The mortgage industry has been ferociously lobbying against changes in the bankruptcy law that would help an estimated 600,000 families refinance their mortgages at 100% of the current market value of the home.  This is a solution that will be painful for many families, forcing them into bankruptcy to get some relief.  But it is the only game in town right now to help families negotiate a permanent solution without rewarding the high-risk lenders.

The lenders' first attack on the bankruptcy bill was to claim that the bankruptcy changes would drive all mortgages up by 2 percentage points--a claim that Barney Frank said was made up and that Professor Adam Levitin proved was just flat wrong.  So the lenders have a new plan:  30 days to pack your bag. 

Some say that this new proposal is just designed to head off a bankruptcy bill.  I can't believe that a let-them-eat-crumbs proposal would slow down any serious efforts to help homeowners and to try to stabilize the real estate market.

Full post as published by Credit Slips on February 13, 2008 (boomark / email).