According to the Wall Street Journal, House Judiciary Chairman John Conyers's has introduced a bill that would allow bankruptcy judges to modify home mortgages by reducing both the interest rate and principal amount on the loan. This is a really bad idea. A mortgage is a contract between the lender and the borrower. The cost of the loan is based on the amount of risk and the value of the asset mortgaged. If the risk increases (which it would if banks could not be sure the terms of the original mortgage would be met), the cost of borrowing money for any reason would increase.
This has proven to be the case historically. According to the article:
"in 2005, Congress eliminated the power of bankruptcy judges to modify auto loans. A recent staff report by the Federal Reserve Bank of New York estimated a 265 basis-point reduction on average in auto loan terms as a result of the reform."
Part of the cause of the problem we now face with mortgage foreclosures is people buying homes they could not afford and banks making risky loans. All of us need to step back and take a big breath and realize that we all need to be responsible for our spending. Allowing people to stay in homes they can't afford is not an answer.
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