Wednesday, July 18, 2007

International Herald Tribune Editorial - Protection for homeowners

International Herald Tribune Editorial - Protection for homeowners
Copyright by The International Herald Tribune
Published: July 17, 2007


Rising mortgage delinquencies in the United States are likely to be followed by rising consumer bankruptcies and, with them, the first big test of the federal bankruptcy reform law of 2005. Early indications are that low- to middle-income borrowers will be unduly punished.

The new law's expensive and cumbersome requirements have already discouraged some hard-pressed homeowners from seeking bankruptcy-court protection. If they do enter bankruptcy proceedings, the restructuring process, known as Chapter 13, prohibits the bankruptcy court from modifying the repayment terms of most mortgages on a primary home. So bankrupt homeowners must still repay their mortgages in full or lose their homes.

That lender protection is a holdover from 30 years ago, when mortgage bankers required ample down payments and most home loans had fixed interest rates. But many of the mortgages issued during the housing boom required little or no down payment, and have adjustable rates primed to go up sharply and rely for their repayment on continued hefty increases in housing prices.

The result is that lenders who abandoned caution during the housing boom are protected while the law gives no aid to borrowers who were enticed, and at times deceived, into risky mortgages.

Before foreclosures climb any higher, Congress must reform the bankruptcy law. Legislators should put mortgages on the same footing as other secured debt. Doing so would help restore consumer bankruptcy to its purpose - to provide a safety net for borrowers who can't repay their debts for reasons beyond their control.

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