Fallout: The Financial Crisis

Mortgage powers to bankruptcy judges

John Dimsdale Nov 19, 2008
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Fallout: The Financial Crisis

Mortgage powers to bankruptcy judges

John Dimsdale Nov 19, 2008
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TEXT OF STORY

Steve Chiotakis: Part of the fallout from the financial crisis is this idea that being flexible is key. In testimony before Congress yesterday, the Treasury Secretary, Henry Paulson said in regards to the $700 billion federal bailout package passed last summer, the government should disperse cash to where it would do the most good. According to Paulson, buying up bad loans wasn’t the most good.

So later this morning, a plan B, if you will. And it involves Congress as well. The Senate Judiciary Committee will consider allowing bankruptcy judges to modify terms of mortgages for homeowners in trouble. Here’s Marketplace’s John Dimsdale.


John Dimsdale: David Kittle, chairman of the Mortgage Bankers Association, will tell committee members today that if bankruptcy judges are allowed to reset hundreds of thousands of troubled mortgages, the backers of those loans will lose their investments.

David Kittle: And they will be unwilling to re-enter the market because the risk is too great. Unless substantial downpayments are required.

Which he says will put many mortgages out of reach for the middle class. But Eric Stein of the Center for Responsible Lending says bankers would work out easier mortgage terms if they knew bankruptcy judges would be cutting the loans down to size. That could avoid foreclosures and bankruptcies in the first place.

Eric Stein: The goal would be to increase the number of voluntary modifications, which simply have not happened in large enough numbers to deal with the foreclosure crisis.

Congress has tried before to approve bankruptcy mortgage modifications. Stein is optimistic that support from the incoming Democratic administration will give the idea more momentum this time.

In Washington, I’m John Dimsdale for Marketplace.

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