From the Providence (R.I.) Journal — Originally published Tuesday, March 31
One proposed tool for stemming the foreclosure crisis is letting bankruptcy-court judges reset the terms of troubled mortgages. Currently they may legally take such action on an array of consumer debt, including second-home mortgages, but not on debt for primary residences. Recently, the House passed a narrowly tailored measure that would lift this restriction.
Many lenders and other critics vociferously oppose such a step. They argue that weakening the original mortgage contracts would increase lenders’ risk, and hence force up interest rates. Future home buyers would pay the price. In addition, a flood of bankruptcies could harm other forms of consumer credit, since a bankruptcy proceeding considers all of the applicant’s debt …
As with all proposed solutions to the crisis, critics resent the possibility that people who borrowed foolishly or are living beyond their means may be helped. So might be home owners who are in no actual danger but who might abuse the bankruptcy option to get a better deal.
First, it helps to keep in mind that the main goal of halting the foreclosure tide is not to assist greedy, misguided or unfortunate people. It is to stabilize the housing market. Stabilizing the market would assist all Americans, by preserving personal wealth and speeding an overall recovery.
But second, the House measure would not impose a fundamental change. The bankruptcy option would apply only to existing mortgages, not future ones. Thus there should be no long-term harm to mortgage-interest rates. …
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