What if bankruptcy law was changed?

Law Professor David Arthur Skeel

TEXT OF COMMENTARY

KAI RYSSDAL: You know how every now and then we tell you about the Consumer Confidence Index? How people are feeling about the economy on a scale of one to 100? That's a handy measurement as far as it goes, but I'd submit we're getting perhaps the ultimate consumer confidence indicator today. That the elections are happening as the real estate market is still being plagued by foreclosures and misplaced paperwork only adds to the overall sense of economic unease.

So here's an item we took notice of this morning: The Census Bureau reports that home ownership rates are at its lowest level in more than a decade.

That got commentator David Skeel pondering a foreclosure 'what if'.


DAVID SKEEL: The worst thing about the current foreclosure crisis is that we could have been out of it long ago if the big banks weren't so blinded by their own short-term financial interests. They ignored the long-term consequences for millions of home owners, the economy, and themselves.

Let's go back three years ago. The real estate bubble burst and home owners ended up owing a lot more than their homes were worth. But the most obvious fix to this problem was ignored: All we needed to do was tweak the bankruptcy law.

With almost any other kind of loan, a struggling consumer can restructure the obligation in bankruptcy if the property has plummeted in value. If this rule applied to mortgages, hundreds of thousands of home owners who still have an income might have restructured their mortgages and kept their homes. And the great cloud of uncertainty that continues to paralyze America's real estate markets would have lifted.

But home mortgages are different. They can't be touched. So mortgages that are under water, stay under water -- even in bankruptcy. All Congress needed to do was change this rule, so that home owners could restructure their mortgages in bankruptcy. Why hasn't Congress done this? The big banks, of course. As the foreclosure crisis deepened, they lobbied hard against any reform. Their claim? It would be too costly and wasn't necessary. Banks simply weren't willing to accept the short-term cost of writing down troubled mortgages to reflect realistic property values.

Once upon a time, banks knew the difference between short-term and long-term interests better than anyone else. They borrowed money short-term, and used it to make long-term loans to home owners and businesses. But they seem to have forgotten how this works. And now they, and all of the rest of us, are paying the price.

RYSSDAL: David Skeel is a professor of law at the University of Pennsylvania. His most recent book is called "The New Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) Consequences." Share your thoughts with us.

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