Bankruptcy Law is Key to Obama's Foreclosure Fight

by Zach Carter, Media Consortium MediaWire Blogger

President Barack Obama unveiled his administration's plan to fight foreclosures on Wednesday. Unfortunately, the most important element of the program will require Congressional action—and the banking and business lobbies are already on the attack. The Homeowner Affordability and Stability Plan has three chief components:

  • Offer financial incentives to persuade loan servicers to modify mortgages
  • Allow Fannie Mae and Freddie Mac to refinance more mortgages
  • Change bankruptcy laws and give judges the power to reduce the amount borrowers owe on their mortgages.

The financial incentives probably won't help much, as Kevin Drum writes for Mother Jones. When a bank makes a mortgage, it doesn't usually hold onto the loan. Instead, the loan is packaged into a security with a other loans and sold to several investors. Another bank collects payments on the mortgage for the security's investors and acts as a point of contact, or loan servicer, for the borrower. To date, servicers haven't shown much interest in keeping people in their homes, even though foreclosure is the worst option for all parties involved.

"Loan servicers already have an incentive to rework loans that would otherwise go into default, and for the most part they aren't doing it," Drum writes. "Will a couple thousand dollars [of incentives] change their internal calculus?"

The provision aimed at Fannie and Freddie will help some. It's also a good use of the government's authority over the companies, which were nationalized last summer. But the key to Obama's plan is the bankruptcy provision. Until now, every government-enacted plan to reduce foreclosures has relied on incentives to encourage the banking industry to keep people in their homes. As Drum notes, bankruptcy is the stick behind those carrots. Obama is supporting a bill in Congress that would enable bankruptcy judges to reduce the amount a borrower owes to the present value of the home. The beauty here is that investors who own the mortgage securities, not taxpayers, will have to eat the losses. In short, investors will be held responsible for making a poor investment.

"The government is essentially presenting a choice for mortgage lenders: take our deal, which is standardized across the entire industry, or let a bankruptcy judge modify the loan however he or she sees fit," Tim Fernholz writes for The American Prospect.

The bank lobby has been fighting the bankruptcy law change since the foreclosure crisis began in 2007, and they wasted no time lashing out at Obama's proposal today. Elana Schor of Talking Points Memo highlights a nasty statement released by the U.S. Chamber of Commerce, one of "Washington's biggest lobbying groups." The release not only attacks the Homeowner Affordability and Stability plan, but takes a shot at Treasury Secretary Timothy Geithner as well, saying the policy "should have undergone a stress test to determine if it's ready to stabilize a major portion of our economy." Stress tests for the financial viability of banks were a big part of the murky bank bailout plan Geithner rolled out last week.

If Congress fails to pass a bankruptcy law overhaul, the entire plan will fall apart. And the record so far is not very promising—last year's bill garnered only about half of the votes necessary to override a filibuster in the Senate.

Team Obama deserves credit for taking action on foreclosures, as John Nichols writes for The Nation. The Bush administration spent years vilifying troubled borrowers and then dedicated hundreds of billions of dollars bailing out banks. If Congress can't pass bankruptcy law reform, the government should simply force banks to modify loans. The strategy would be simple—either keep borrowers in their homes, or return your check from the federal government.

"Ohio Congressman Marcy Kaptur and economist Dean Baker have some smart ideas," Nichols writes. "They argue that the proper role for the federal government is not to fund mortgage negotiations but to insist that banks—many of which have already collected billions in taxpayer dollars—carry them out."

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Are you just

cross posting without modification here? You need to modify posts with the title and first couple of lines so a blog does not get punished for having duplicate posts. Thanks.

Then, your immigration link sure looks 100% open borders and special interests, not too progressive and assuredly not based on economics.

EP is an economics site as well as non-partisan and posting economic fiction is a sacrilege. Those links are in violation of both rules.

Not surprising

The News Ladder in general is corporate globalist left wing for the most part.

NOT grounded in either science or mathematics, but with a definite New World Order agenda.

Maximum jobs, not maximum profits.

can you verify that?

Give me some specifics here. I didn't read most of the posts being that except on that "immigration" link, which clearly was almost the open border news channel.

I clicked on the "Newsladder" link

And their About Page give a good reason why they're so one-sided. Their Top Ten Stories also gives a pretty good view what they're about. Pretty much the standard "World without borders, no traditional roles for anybody" motif.

Maximum jobs, not maximum profits.


I just went over and reviewed this. First we have a problem that they are not economics writers/posters per say.

but bear in mind many of us also write on these same sites and there are some very good posts on many of them, founded in economic reality.

While EP is an economics site, non-partisan, the reality is we have a lot of people who truly are "Progressive bloggers" posting and that's because there are many forces trying to get sane economic policy that also strengthens the U.S. middle class....

The problem is these beyond insane open borders organizations, or unlimited migration trying to claim this would actually help the U.S. economy...when if this happened it would make the race to the bottom look like the cliff to the bottom...have invaded the left.

There are many Progressives and left head bloggers who know this is economic fiction and are squeezed out, silenced by the various name calling of racist xenophobe by these various groups.

So far, the posts have been focused on policies that are economically based, referencing some of the more well known Journalists etc. on some of these policies so that's all ok.

This person cannot do "drive by" posts. Many of us are cross posting but we are changing blog titles, linking over to EP so the site does not get punished for duplicate posts.

I think this person needs to stick to the requests and change that and if they are using the site as just some additional place to duplicate content, generate links and not communicate, comment, discuss....this is a problem.

I'll remove the immigration links from the posts since it is off-topic as well as promoting economic fiction.

Variable Loan-side Risk

"So why not treat the principle amount of a loan as a percentage of the market value? Revalue a property every 3 months or so and adjust the loan balance up or down by a percentage of the house value movement. Forcing the banks to wear the risk and get the reward when the price changes."

--Spike (posted on Steve Keen's Debtwatch)


Didn't Bush sign a bankruptcy reform bill in 2005? I thought this was supposed to repair the entire system?