An article on the housing crisis is available on SSRN, just at the time that Congress reconsiders the question of whether homeowners should be permitted to modify their mortgage loans in bankruptcy, just like every other debtor can do, for credit card debt to debt on the purchase of that luxury yacht. John Eggum, Katherine M. Porter, and Tara Twomey have published Saving Homes in Bankruptcy: Housing Affordability and Loan Modification, 2008 Utah L. Rev. 1123. Here's the abstract:
This article examines the home affordability of chapter 13 bankruptcy debtors under current law, which prohibits the cram down or modification of residential mortgage loans. Using original empirical data from a national study of over 1700 chapter 13 bankruptcy cases, it analyzes the relationship between housing costs and income for bankrupt households. More than two-thirds of homeowners in chapter 13 bankruptcy live in unaffordable or severely unaffordable housing, according to the standards developed by the Department of Housing and Urban Development. Such families spend more than 30 percent of their incomes at the time of bankruptcy on paying their mortgages and related housing costs. The large fraction of their incomes that bankrupt homeowners commit to paying their housing cost reduces the odds that they will succeed in saving their homes in bankruptcy and completing their chapter 13 repayment plans. The Article considers how these data could inform the debate about whether Congress should amend the Bankruptcy Code to permit the modification of home mortgages, offering examples from real bankruptcy cases to show the beneficial effects of mortgage modification to create sustainable homeownership. It concludes that permitting mortgage modification would enhance the usefulness of bankruptcy as a tool to address the foreclosure crisis.
The House passed Rep. Conyers' bill this week. Now the Senate needs to act. Hopefully, the Senators will read this information and recognize that modifying mortgage indebtedness in bankruptcy could help solve the foreclosure crisis, and thereby help solve the current deep economic crisis. We learned on Friday that 651,000 jobs were lost in February, sending the unemployment rate to 8.1%. Goodman & Healy, Continuing Job Losses May Signal Broad Economic Shift, New York Times, Mar. 6, 2009. That article notes that the "800-pound gorilla is whether we face up tot he bad loans in the financial system" Id. That means, from my perspective, (i) letting bank shareholders eat the losses, so that the good assets can be separated off to keep the bank system working, (ii) reinstituting the Roosevelt-era lines between commercial banks and investment banks, so that ordinary Americans' hard-earned savings are not put at risk by greedy investment bankers' speculative risk-taking, and (iii) making sure that a strong anti-trust system prevents any one financial institution from ever again growing "too big to fail." But if those jobs translate to even one-tenth that number of homes in foreclosure, the poverty, homelessness, and deteriorating neighborhoods problems will continue to mushroom. So the other 800-pound gorilla in the room is the foreclosure crisis itself. Congress needs to enact bankruptcy reform now, while it can make a difference in dealing with this crisis.
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