Back in December, I published a newspaper column looking at a little-noticed Federal Reserve Bank report showing that the Bankruptcy Bill of 2005 is now causing 32,000 foreclosures every quarter. Well, now there's a move afoot on Capitol Hill to amend bankruptcy laws to finally help homeowners and reshape the fundamentally unfair dynamics afflicting the economy - and you can help make this key reform a reality.
Here's the Democratic Dear Colleague letter I just got my hands on that is being circulated in the House:
Dear Chairman Frank, Obey and Spratt:
A record ten percent of all American homeowners with mortgages are either facing foreclosure or otherwise delinquent on their payments. Credit Suisse now estimates that 8.1 million families will lose their homes to foreclosure by the end of 2012. If the recession becomes severe, which seems increasingly possible every day, the number of foreclosures could rise to 10.2 million. Current voluntary efforts to modify delinquent mortgages are simply not working. Earlier this week, the chief regulator of national banks acknowledged that most U.S. mortgages modified in a voluntary effort to keep struggling borrowers in their homes and stem foreclosures fell back into delinquency within six months.
Voluntary mortgage modifications do not work in part because many mortgages have been securitized, which makes reaching an agreement among all those who have an interest in a mortgage extremely difficult. The problem is further compounded by the fact that some investors have sued while others have threatened to sue servicers if they modify these loans.
That is why the January stimulus package must include a provision to allow judicial modification of mortgages on primary residences. Under current bankruptcy law virtually every type of loan can be modified (including loans secured by a car, boat, farm or vacation home), except home mortgages. By correcting this anomaly, Congress will help between one quarter and one third of homeowners facing foreclosure save their homes. In addition, many others will be in a better position to negotiate a consensual agreement with their lenders, knowing that juducial modification is available. And, this measure will not cost American taxpayers a single penny.
Giving bankruptcy judges the power to modify the terms of home loans would follow in the best tradition of Franklin Roosevelt's New Deal - the tradition that "gives a group a market power it did not have before," as John Kenneth Galbraith noted in his theory of the "countervailing power."
Clearly, banks have had way too much power in the last few years, and the market has become wildly distorted. By empowering bankruptcy judges to renegotiate loans on fairer terms, the government can address this market distortion by creating a "countervailing power" - one that represents homeowners.
During the original debate over the bailout, progressives and many members of Congress were ignored in their demands to pass this simple reform. Financial firms effectively argued that they should be able to receive billions of bailout dollars with no strings attached, while being immune from renegotiating predatory or unfair loans that are destroying the housing market, harming homeowners and wreaking havoc on the economy.
But now, there's new momentum. The Sacramento Bee reports that Citigroup has agreed to support the bankruptcy change - a watershed shift for a huge financial firm, and one that could "suggests a crack in industrywide resistance" if there's enough public pressure. As one bankruptcy attorney told the newspaper, "This is the foot in the door- I think for the first time we have a decent chance of actually seeing this go through."
Along with Frank's efforts must come bankruptcy reform that would create that Rooseveltian countervailing power - and at no cost to the federal government. Knowing that bankruptcy law is intimately involved in the foreclosure crisis, there should be absolutely no question as to whether a Democratic president and Democratic Congress passes this provision as part of the economic recovery package.
But you know there will be a question. You know there will be resistance from Republicans and possibly industry-backed New Democrats. So it's time to spin up the pressure system.