posted by admin on Mar 9

Editorial from The Cleveland Plan Dealer March 9, 2008: Using bankruptcy code to help those facing foreclosure makes sense; urging banks to rework loans is insufficient Sunday, March 09, 2008U.S. economic trends are so bleak that central bankers are uttering phrases rarely used in their muted lexicons, including “fragile market conditions” and “substantial risks.”

They’ve got plenty of reasons to be glum.

February and January registered the worst back-to-back job losses in five years; foreclosures have climbed to record levels; and home values have fallen so far that - for the first time since the Federal Reserve began tracking this in 1945 - the debt Americans owe on their mortgages surpasses the equity they’ve built up in their homes.

Economists no longer speculate about the risk of recession, but about its length and depth.

Ben Bernanke, Federal Reserve chairman, has stepped up pressure on banks to rework mortgage terms for borrowers who can’t afford their loan payments and can’t refinance because of plunging home values.

It’s a reasonable enough premise, but too few lenders are heeding the call. Instead, they’re tightening credit standards across the board.

There’s no time to delay crafting a workable response, because foreclosures - which erode the equity of not only the families affected but that of their neighbors and their communities, too - are going to soar.

One approach would be to amend the bankruptcy code. A bill sponsored by Senate Majority Leader Harry Reid of Nevada would allow judges to modify mortgages on primary residences, which isn’t currently allowed.

Restructuring and reamortizing debt is the “heart and soul of the bankruptcy process,” J. Rich Leonard, a judge in the U.S. Bankruptcy Court for the Eastern District of North Carolina wrote recently. It’s done frequently with any debt - except that which is secured by the family home - including yachts and holiday homes.

“Bankruptcy courts are often the canaries in the mine shaft, noticing changes in the economy before they become readily apparent to others,”

the judge wrote. They see mortgages with extremely high interest rates and payments far bigger than what the debtor could afford under any reasonable underwriting standards, according to the judge.

Under the bill, judges would use a formula to set an interest rate and loan value for borrowers who met certain criteria. That would offer transparency and predictability.

This plan wouldn’t help everyone. In Ohio, fewer than half of the homeowners facing foreclosure file for bankruptcy, which mars credit reports and imposes tight financial limits for years.

Still, this approach could help keep 600,000 Americans in their homes.

That should be lenders’ goal because it also keeps payments coming in.

But without changes to the bankruptcy code, lenders have little incentive to rework loans.

Senate Democrats are trying to revive the proposed bankruptcy changes, blocked recently by Republicans. Lawmakers ought to see that, despite opposition by many lenders and the White House, this is not a political issue, but an economic one. Why stand in the way of a viable option to help thousands of homeowners who, otherwise, will tumble into foreclosure?