The following is from a recent New York Times column:
Holding Up the Housing Recovery
We welcomed President Obama’s plan, unveiled in March, to head off foreclosures and keep more Americans in their homes, but we feared that it wouldn’t be enough. We were particularly concerned that without a reform of the bankruptcy code, lenders wouldn’t do enough to voluntarily modify troubled loans.
Seven weeks later, bankruptcy reform legislation is stalled in the Senate because of Republican opposition. Meanwhile, foreclosure filings — including notices of default, auctions and repossessions — rose again in the first three months of this year.
Moody’s Economy.com is projecting that 3.4 million homeowners will default on their mortgages in 2009 and 2.1 million will lose their homes. Those projections may prove too rosy because they assume that the Obama plan will be largely successful. That’s far from assured.
The plan establishes industrywide guidelines for modifying troubled loans. And it provides financial incentives to lenders to rework those loans so that they’re more affordable, generally by reducing the interest rate.
It also calls on Congress to amend the bankruptcy code so that borrowers facing foreclosure can have their mortgages modified under court protection. That is key.
Lenders are more likely to voluntarily modify bad loans if the alternative is to lose control of the process to a judge. Bankruptcy also may be a borrower’s only hope if a lender will not rework a troubled mortgage or if a borrower cannot afford even modified terms.
Without the bankruptcy fix, foreclosures will likely outstrip lenders’ efforts to prevent them. The Obama administration projects that its plan will help three million to four million homeowners to avoid foreclosure by lowering monthly payments. The Moody’s Economy.com analysis estimates that up to two million mortgages will be voluntarily modified under the Obama plan and that up to 1.25 million will be modified in bankruptcy court.
If the reform does not pass, Moody’s Economy.com says its estimate of the number of modifications would drop by more than half, with 475,000 fewer voluntary modifications and zero court-approved modifications.
The House passed reform legislation more than a month ago. Senate Democratic leaders say that nearly all 58 members of their caucus are on board. Republican leaders say all 41 of their senators will block a vote. If they hold ranks, it would mean that senators from states hardest hit by foreclosures would help to ensure the bill’s failure — including John McCain and Jon Kyl of Arizona and John Ensign of Nevada.
Republican opposition appears to have more to do with fund-raising than principle. The American Bankers Association and other lobbies remain opposed to the fix. Sam Geduldig, a lobbyist for several banking trade associations, recently told The Times’s Stephen Labaton and Eric Dash that as a minority party, Republicans will get “professional donors and lobbyists to look at them in a different light,” if they show they can affect policy.
There might be some good news. Several powerhouse banks, including JPMorgan Chase, Bank of America and Wells Fargo, have been talking with Democratic leaders in recent days about crafting a bankruptcy fix. Democrats hope the big banks can rope in a few Republicans. The danger is the bill could be watered down.
The Obama administration, which is propping up the banks, should put more pressure on them to support a robust bankruptcy reform.
If that doesn’t work, there’s always the appeal to reason.
Republican senators need to understand that a vote against this reform is a vote against economic recovery. As foreclosures add to the glut of unsold homes, house prices will continue to fall. That will lead to more foreclosures — declining equity is a risk factor for default — and more defaults and foreclosures will hamper the banks’ recovery and further constrain credit. And so on.
The White House needs to argue the case for bankruptcy reform forcefully on Capitol Hill — and to voters.
