Francisco Torralba writes:
First of all, settle on a bankruptcy text and stick to it. The latest
overhaul of the Bankruptcy Code took place as recently as 2005.
Regulatory uncertainty inhibits lenders.
should give the two parties in a contract more leeway to renegotiate
their loans. I applaud the congressmen’s proposals to allow
modifications of the terms of the original loans, but they could go
further. For example, they should allow converting 30-year adjustable
rate mortgages (ARM) into 50-year fixed-rate mortgages.
modifications could be proposed by the court, but then they should
require consent from both mortgagee and lender. Two of the bills under consideration — the ones by Senator Durbin
(D-IL) and Representative Miller (D-NC) — allow the bankruptcy court
to modify the terms of the loan without restrictions, not even
agreement in writing between the parties. Giving such power to the
court has at least two effects. First, it tilts the balance towards the
consumer — in a free negotiation between mortgagee and bank, the
latter would have the upper hand. Second, it increases the uncertainty
of the bank’s payoffs. Both effects reduce the supply of debt.
should also modify the Code so that the least creditworthy borrowers
have more incentives to file for Chapter 7 instead of Chapter 13.
Going beyond the current problems, better ex ante disclosure would be welcome. Most borrowers don’t understand 95 percent of the legal mumbo jumbo on their contracts. Mortgage applicants should be given worst-case scenario simulations of their monthly payments.
We could also set a floor on “teaser” introductory mortgage payments. Hybrid ARM’s,
for example, start out carrying a low, fixed rate. Two to five years
later the interest rate resets to a higher, floating level. Option ARM’s
let the borrower initially make interest-only payments, minimum
payments (often below the interest accrued), or fixed, low-rate
payments, also until the first reset date. Any of those schemes make
mortgages affordable, but only for the first few years. Legislation
could provide, for example, that initial monthly payments never be
below 80 percent of the expected payment after the first reset date.
Here is Francisco’s blog, if you don’t already know it.