Bankruptcy Judges May Help Mortgage Holders

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Congress is struggling over what to do about the epidemic of home foreclosures. Senators told some of the nation's biggest bankers Thursday that they should do their part to help homeowners. If they don't, Congress might turn to bankruptcy judges to rewrite the terms of mortgages — as they already do for car loans and even vacation homes.

STEVE INSKEEP, host:

It's Morning Edition from NPR News. I'm Steve Inskeep.

ARI SHAPIRO, host:

And I'm Ari Shapiro sitting in for Renee Montagne. We're about to hear some of the competing proposals to help out people who can't pay their mortgages.

INSKEEP: One plan comes from the woman whose agency insures your bank deposits and we'll hear from her in a moment.

SHAPIRO: We begin with a warning from the U.S. Senate. Lawmakers told bankers that they should help out homeowners and if the banks don't, bankruptcy judges might. Here's NPR's David Welna.

DAVID WELNA: At a table facing members of the Senate banking committee sat four senior executives from Wells Fargo, JPMorgan Chase, Goldman Sachs and Bank of America. Together, their institutions have received in the last few weeks, $85 billion in stock purchases from the financial bailout program. They also got a collective scolding from the committee's Democratic chairman, Christopher Dodd.

Senator CHRISTOPHER DODD (Democrat, Connecticut): I think I speak for many of members of this committee and the Senate is saying that we want to see more progress. We are friends of the financial sector, more progress in foreclosure mitigation, and affordable lending and incurving excessive compensation. And of that, progress is not forthcoming that we are prepared to legislate now if possible, but next year if necessary.

WELNA: Dodd said he may try in next week's lame-duck session of the Senate to change bankruptcy laws so that homeowners can seek chapter 13 protection for their primary residence if it's in danger of foreclosure. The Senate blocked such a move earlier this year, but Dodd appears emboldened by the half-dozen or more seats that Senate Democrats added in last week's election.

Sen. DODD: The idea that you can go into bankruptcy court and protect your boat if you want to, your car and your vacation home. You can do those, they are all contracts. You can protect those in the bankruptcy court, but you can't protect your primary residence. There's something fundamentally false about that notion.

WELNA: Joining Dodd's push for bankruptcy protection for primary residences was a witness who is not a banker. Nancy Zirkin of the Leadership Conference on Civil Rights said the possibility of resorting to such protection would give homeowners much greater leverage re-negotiating the terms of their troubled mortgages.

Ms. NANCY ZIRKIN (Leadership Conference on Civil Rights): It doesn't use public funds and more importantly it would quickly help other homeowners and our economy by keeping the value of the surrounding homes from being eroded, stopping a vicious cycle that can only lead to more foreclosures.

WELNA: But the idea of bankruptcy judges intervening on home foreclosures troubled Florida Republican Mel Martinez.

Senator MEL MARTINEZ (Republican, Florida): I know that it is appealing to think that a judge could just modify the mortgage. However, my lawyerly sense tells me that if you have a contract and all of a sudden, it's going to be dramatically modified by a judicial fee that may be something that investors might look scarely at and may be a liquidity issue going forward in terms of mortgage money.

WELNA: All four witnesses from the big banks said they opposed such court dictated mortgage revisions which are known in the industry as cram downs. Wells Fargo's Jon Campbell warned that cram downs would only increase uncertainty for financial investors.

Mr. JON CAMPBELL (Wells Fargo): Investors are going to require two things to happen to try an offset of the uncertainties. One, down payment. Some will probably be increased and logically prices would be increased to try and offset some of the uncertainties that exist by contracts being able to be just crammed down.

WELNA: A top Democratic leadership aide predicts in next week's lame duck session, there's little chance Republicans will drop their opposition to changing the bankruptcy law to favor homeowners with a bigger Democratic majority next year though, it may be a different story. David Welna, NPR News, the Capitol.

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