Bankruptcy

What Does the Wall Street Bailout Mean to You?

If you have been following the news, you know that a few days ago, the United States Congress passed a multi-billion dollar "bail out" of Wall Street firms and insurance companies that underwrote the risk to these firms.?? As of today (October 10, 2008), the bail out does not seem to have inspired much confidence and stock markets around the globe are tanking.

From my perspective as a bankruptcy lawyer, the collapse of the subprime mortgage market and the investment banking houses that underwrote these loans is not really a surprise.?? For years I met with homeowners who had "qualified" for mortgages that they clearly could not afford and who turned to bankruptcy to buy some time and perhaps to save their home ownership.

There has been a lot of talk recently about changing the bankruptcy laws to permit bankruptcy judges to rewrite the terms of mortgage loans.?? Many of my bankruptcy lawyer colleagues support this step as a tool to help struggling homeowners.?? With all due respect to my esteemed colleagues, I strongly disagree with such a move.?? The terms of mortgage loans reflect the risk inherent in writing a mortgage loan.?? Currently lenders price loans based on the likelihood of default.?? If we add another risk factor - the likelihood of having a bankruptcy judge arbitrarily reduce the balance or change the terms, the cost of mortgage loans will go up and the market for mortgage backed securities will become much less liquid.

Right now a fundamental problem in the mortgage industry is that a growing number of houses are worth less than the debt owed.?? Many homeowners in this situation are paying their mortgage loans as they would any other debt but clearly the stability of the real estate and mortgage markets will be negatively affected if homeowners have nothing to lose by giving up homes worth less than what is owed.

There are a number of suggestions about how to resolve this situation and I expect that we will continue to hear about this problem.?? My colleague Reed Almand in Dallas recently wrote a blog post about something called "Hope for Homeowners" that combines a voluntarily reduction of balances by mortgage companies with government underwritten loans.

What do you think??? If you are a homeowner who is struggling to maintain payments on a mortgage on a house that has dropped in value, what are you thinking??? Please let me know.

Full post as published by The BK Blawg on October 10, 2008 (boomark / email).