Two years ago, the solution to the foreclosure mess generating the most attention, including support from then-Presidential candidate Barack Obama, was a proposal to change our bankruptcy code to allow mortgages on primary residences to be modified in bankruptcy. It even garnered support from a long list of diverse supporters including community groups, legal scholars and industry players such as Citigroup Inc., and the National Association of Home Builders.
Yet, politics being what they are, here we are two years later and much deeper into the housing crisis, with no better solution on the horizon. The Helping Homeowners Save Their Homes Act of 2009 passed the House was killed in the Senate, where legislators turned their back on hurting homeowners. This morning I heard NPR citing a prediction by Rick Sharga of RealtyTrac that the US housing market is not likely to stabilize until 2014. And in the meantime, a record number of houses will be repossessed next year. Just how many Americans will have to lose their homes, and how much more wealth will have to be drained from those who continue to stay in their homes, before we come to a real solution?
It’s time to get back to basics and reconsider judicial modification of mortgages as a way to stabilize this dying patient before she bleeds out on the table.
A quick background: For decades, bankruptcy courts have been the place where individuals, families, and businesses large and small get a second chance. Income and assets are scrutinized by bankruptcy lawyers, trustees and judges. When it’s determined that there is enough money to pay at least some creditors, payment plans are made. When there is not enough to go around, some or all debts are discharged. The process is not easy or painless, yet it is effective. In fact, our bankruptcy code is credited with contributing to one of the most robust small business start-up climates in the world.
Yet there is one Mack-Truck-size pothole standing in the way of the American homeowner who wants to hang onto his or her home. One report [pdf] describes it as an “anomaly in the 1978 Bankruptcy Code, which singles out home mortgage lenders for special protection and makes the home mortgage on the primary residence virtually the only debt the court cannot modify and the home the only asset it cannot protect.” Even then, home mortgages were commonly restructured in bankruptcy until a 1993 Supreme Court decision essentially put an end to the practice.