[WASHINGTON, DC] – United States Senator Dick Durbin (D-IL) released the following statement in response to the President’s speech today on the housing crisis facing American homeowners.

“There is absolutely no evidence to suggest that altering mortgages on one percent of mortgage holders will affect interest rates for all homeowners.”

“In fact, a report released by the Georgetown Law Center said that allowing these changes will have ‘zero’ effect on interest rates. The President’s statements today are simply inaccurate.”

“It is clear that as this crisis continues to worsen, the Bush Administration is running on empty with no new ideas and is unwilling to show the kind of leadership that we need to turn this economy around.”

Durbin is the author of the Helping Families Save Their Homes in Bankruptcy Act – a bill that could help 600,000 at-risk homeowners keep their homes by altering the terms of their mortgages in bankruptcy. Two weeks ago, Senate Democrats attempted to bring this bill to the floor as part of the Foreclosure Prevention Act, a package of housing bills aimed at helping current and future homeowners and restoring stability in the market. Republicans balked and blocked even debating the bill.

Myths Vs Reality of Allowing Mortgage Adjustments in Bankruptcy

The big banks that created this mess continue to make arguments that do not hold up to even moderate scrutiny. 

Myth #1:    This bill will inject uncertainty into the markets and therefore raise the cost of credit to future borrowers. (Financial Services Roundtable and Mortgage Bankers Association as quoted in American Banker on 2/26)

Reality:    There is absolutely no credible evidence to support the claim that the mere possibility of a small subset of mortgages being changed in bankruptcy would somehow raise the cost of all mortgages by 1.5 to 2 percentage points, as the big banks claim. 

In fact, a study released earlier this month (http://works.bepress.com/adam_levitin/11/) concluded that allowing strip downs would have no impact on the cost of credit at all. 

Finally, since the bill language excludes all future loans from bankruptcy consideration altogether, there is no way to credibly claim that these same loans will be more expensive.

Myth #2:    Changing the bankruptcy code will roil the credit markets because no one will know what change to contract law will be made next. (American Bankers Association as quoted in American Banker on 2/26)

Reality:    If the credit markets were so sensitive to changes that Congress might make, the markets would already have accounted for all sorts of such “risks”.  The credit markets are in disarray because of the mortgage bankers’ irresponsible actions, not because of Congress.

Myth #3:    Allowing modifications in bankruptcy will limit the effectiveness of the Bush Administration’s voluntary plans such as the Hope Now initiative. (American Bankers Association as quoted in American Banker on 2/26)
 
Reality:    The possibility of mortgages being modified within bankruptcy will provide extra motivation to lenders and servicers to offer modifications outside of the context of bankruptcy, and hence more workouts will likely result. 

In any case, the voluntary programs promoted by the lenders like Hope Now are helping a tiny proportion of those who need help to get through this crisis, and so a change in the bankruptcy code can hardly make that progress worse. 

According to the mortgage bankers own data released in January, lenders are initiating foreclosures 13 times more frequently than they are modifying problematic adjustable-rate subprime loans.  Only 3% of homeowners with adjustable-rate subprime mortgages are likely to receive a streamlined loan modification from their lender, according to the Center for Responsible Lending. 

Finally, to the extent lenders and servicers have been hindered by fear of investor lawsuits, judicial modifications could help speed that process by removing any such liability.

Myth #4:      It is wrong to interfere with existing contracts via changing the bankruptcy law.

Reality:      In 2005 the big banks and the Bush Administration strongly supported changing bankruptcy rules that applied to existing contracts and to future contracts.  Now they are opposing changing bankruptcy rules that applied to existing contracts only.

Why?  Could it be because in 2005 the changes being considered benefitted the banks, but they think that the changes being considered in 2008 benefit families?

That argument isn’t based in some sort of concern for contract law.  It’s a blatant argument in self-interest.