Can Bankruptcy Law Reform Help?

Can Bankruptcy Law Reform Help?

Even if the government buys hundreds of billions of dollars worth of mortgage-backed securities, it is unlikely that it will be able to protect many Americans from losing their homes, analysts say.

Financial experts say that 90 percent or more of subprime mortgages are held in trusts that have been sold to institutional investors around the world. Unless every investor agrees, the terms of a mortgage can’t be changed.

''We are literally spending hundreds of billions of dollars on subsidies for financial institutions,'' says Christopher Mayer, a professor of real estate finance and vice dean at the Columbia School of Business. ''This won't do anything to help the housing market. This plan is about buying mortgage-backed securities, not mortgages, and there is a big difference.''

House and senate Democrats as well as consumer advocates are demanding that the law approving the bailout include a change in the U.S. bankruptcy law to allow judges to adjust the terms of the mortgage on a primary residence.

''That is by orders of magnitude the best thing that can be done to keep people in their homes,'' says Eric Stein, senior vice president of the Center for Responsible Lending.

The banking and securities industries, meanwhile, are fighting the change, as they did when it came up with the housing bill that was adopted in July.

''Authorizing write-downs of mortgages by bankruptcy judges will increase the risks of mortgage lending at a time when the market is already struggling, and this will harm consumers,'' wrote Floyd E. Stoner, a top lobbyist for the American Banking Association, in a statement on Monday.

Source: The New York Times, Edmund L. Andrews (09/23/08)