New data released today shows that “a stunning 48 percent” of homeowners with a subprime mortgage “are behind on their payments or in foreclosure,” and that a record 5.4 million homeowners were at least one month late or in foreclosure at the end of last year. The House is currently debating a measure that could address these terrible numbers by allowing judges to “cram-down” mortgage payments for homeowners who have filed for Chapter 13 bankruptcy.
Republicans, however, are “on the warpath” against cram-downs, claiming that they will allow homeowners to “game the system” by going “straight to bankruptcy.” Watch a compilation:
So are these representatives saying that they would “go straight to bankruptcy” to lower their own mortgage payments? Before they make such a rash decision, here’s a brief description of the Chapter 13 process:
Under Chapter 13, debtors can be grilled under oath by the judge, the bankruptcy trustee and their creditors, who have every right to see the color of their insides. With bankruptcy filers’ income and outflow subject to rigorous monitoring, they give up every ounce of their financial freedom for three to five years. Once they’re out of bankruptcy they may still owe most of their secured debts, although the payments may be more bearable.
Plus, a bankruptcy can remain on your credit report for up to 10 years. Doesn’t seem so enticing any more, does it?
Far from being used to “game the system,” cram-downs will likely be a last resort for homeowners who can’t find a way to make any other option work. Under the Obama administration’s housing plan, lenders will receive $1,000 for every mortgage modification and $1,000 each year for three years if the borrower does not re-default, giving them every incentive to keep a homeowner out of bankruptcy. The housing plan also offers ample opportunity for refinancing, making bankruptcy the least appealing option for everyone involved.
As Professor Adam Levitin of Georgetown Law School wrote, cram-downs are a “form of foreclosure relief that has no cost to taxpayers, does not create moral hazard…and provides an important future defense against systemic financial system risk.” Indeed, by standing in the way of a housing fix, these Republicans are turning their backs on millions of Americans and preventing a key step toward economic recovery.