As the political tangle thickens over who’ll help cash-strapped homeowners fight foreclosures, Congress is floating a new fix of its own – in old-fashioned bankruptcy courts.
The House and Senate are preparing emergency legislation to let bankruptcy judges replace fraudulent or interest-gouging mortgages with lower payment plans – just as such courts ordinarily do for imperiled businesses.
Meanwhile, criticism mounted over the controversial government freeze on rates for select groups – as proposed by the White House and in a similar plan from Democratic presidential candidate Hillary Clinton. The consensus is to freeze rates for five years for eligible homeowners.
President Bush is set to add more details today on his plan, which appears to help only homeowners with slow-payment histories and credit scores below 620, while leaving hardworking Americans who try to pay on time out in the cold.
“There are a lot of Americans who are making their mortgage payments. They are current, and the benefit won’t go to them,” said Rep. Spencer Bachus (R-Ala.)
The congressional plan would tweak statutes so consumers could use bankruptcy court protection to escape their financial nightmares. Regulations were tightened two years ago to block consumers from walking away from their debts.
Experts said the bankruptcy escape hatch is a proven system that could start immediately, with enough flexibility to separate deadbeats from struggling homeowners.
“This utilizes an existing, efficient, well-established and predictable template to prevent foreclosures, and it would not require the use of government funds,” Henry Sommer, head of the National Association of Consumer Bankruptcy Attorneys, told a Senate panel yesterday.
The House Judiciary Committee expects to clear a similar plan before the holiday recess.
Bankruptcy judges testified that the 2 million foreclosures expected in the near term wouldn’t jam up the system because it handled “far more” than that in a one-month crush just prior to the change in the law in October 2005.
“There is a clear precedent for Congress to solve the mortgage crisis by allowing debtors . . . to strip down mortgage debt,” Bankruptcy Judge Jacqueline Cox of Chicago told the Senate panel yesterday. She added that a similar approach helped solve the farm loan crisis of the 1980s.
Economist Mark Zandi of Moody’s economy.com told the panel that “without a quick policy response like this, there is a substantial risk that . . . surging foreclosures will result in a national economic recession.”
Through October, there were about 1.8 million foreclosure filings nationwide, compared with about 1.3 million in all of 2006, according to Irvine, Calif.-based RealtyTrac Inc. With home-loan defaults still rising, the trend is expected to worsen next year.