New York Times editorial on foreclosure prevention

Waiting (Too Long) for Relief

Published: April 29, 2008

A year into the worst foreclosure crisis since the Depression, the House only now is getting serious about a foreclosure prevention bill.

It is bad enough that it will be weeks or months or next year before Congress actually passes a final relief measure. Worse is that the measure is more supportive of the mortgage industry, whose shoddy practices stoked the crisis, than of troubled homeowners, threatened communities or taxpayers who may have to foot the bill.

The measure, pushed by Representative Barney Frank, the Financial Services Committee chairman, is too much carrot and too little stick. It would guarantee troubled loans that are refinanced by lenders, provided the lenders reduce mortgage balances to an amount equal to 85 percent of the property’s current value.

Participation by lenders would be voluntary. If they or other parties to the loan — like mortgage investors — did not want to reduce the loan balances, they could continue with foreclosures. That is what has happened with other voluntary approaches.

Congress could fix that big flaw by finally allowing bankrupt borrowers to have their mortgages modified under court protection. Lenders would have a real incentive to participate in the bill’s rescue plan if they knew that borrowers had the option of going to court, where a judge could change the terms of a mortgage.

Amending the bankruptcy code will go nowhere without a push by the Democratic leadership, especially House Speaker Nancy Pelosi. The Senate is enfeebled by its bare Democratic majority and a cozy relationship with mortgage industry campaign donors. House members, too, would be loath to displease industry donors unless pushed by the leadership.

The leadership must also make it clear that lawmakers will no longer indulge the overwrought objections of the mortgage industry to the bankruptcy fix. Mainly, the industry claims that credit will dry up and mortgage costs will rise if borrowers are allowed, even temporarily, to modify their loans in bankruptcy. All other secured debt, like vacation homes and rental properties, can be modified in court and that has never frozen credit. The industry issued many of same dire warnings in the mid-1980s when the law was revised to allow farmers to have their mortgages modified in bankruptcy court. None of the supposed dangers came to pass.

Those and other issues have all been vetted before the House and Senate Judiciary Committees, and the bills those committees produced go to great lengths to meet all of the industry’s concerns. It is now up to Ms. Pelosi and her fellow Democratic leaders.

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