Todd Zywicki has a great editorial in the Wall Street Journal this morning on why it is a terrible idea to let bankruptcy judges modify mortgages. I have excerpted on small part of it, but if you are in the real estate or mortgage business, this is a must read.
New legislation being forwarded by John Conyers is working it’s way through Congress right now that would allow mortgage modifications by judges. Read the article here and see how scary this could be for all of us.
In the first place, mortgage costs will rise. If bankruptcy judges can rewrite mortgage loans after they are made, it will increase the risk of mortgage lending at the time they are made. Increased risk increases the overall cost of lending, which in turn will require future borrowers to pay higher interest rates and upfront costs, such as higher down payments and points. This is illustrated by a recent example: In 2005, Congress eliminated the power of bankruptcy judges to modify auto loans. A recent staff report by the Federal Reserve Bank of New York estimated a 265 basis-point reduction on average in auto loan terms as a result of the reform. WSJ.com.