Every time I hear on the news how concerned Congress is with helping homeowners save their homes in foreclosure, I have to change the channel. The only thing worse is when I hear how eager mortgage companies are to modify loans to help homeowners.
Ok, so I am a bleeding-heart, liberal bankruptcy lawyer. I’m supposed to react this way.
Bloomberg.com, however, is supposed to be conservative, fiscally-sensitive, pro-establishment and utterly Republican. So, what happened there this morning? Ann Woolner wrote a nice, little op-ed piece for Bloomberg.com called, Buy a Beach House for Shelter When Going Bankrupt. This Editorial is about the disparate treatment that owner-occupied real estate gets in the Bankruptcy Code over other Real Estate. For my purposes the primary Statute Section is 1322(b)(2).
The basic idea is that in most of the Bankruptcy Code you can effectively strip a secured claim down to the value of the underlying asset. You then only have to pay the asset’s value (with interest, of course) in order to keep the property. Traditionally, this was used to great effect by consumers with cars on which they were seriously underwater. That has pretty well stopped as a result of some changes to the Code in 2005. However, real estate can still be crammed down if you owe more on it than it is worth — but only if it is not the Debtor’s primary residence. If the debt is secured solely by an interest in real estate that is the Debtor’s primary residence, the loan terms cannot be modified in anyway. Residential mortgages are the ultimate sacred cow in the Bankruptcy Court.
To quote Ms. Woolner:
A speculator with slum properties all over the city, who owns a place in Manhattan and a house at the Hamptons, gets better treatment under bankruptcy law than a salaried worker’s family with only one, modest bungalow.
Now, there are a lot of parts of the Bankruptcy Code that don’t seem to make a lot of sense. Some of them are downright contradictory, and some of them are just of questionable policy. What makes this particular provision so gut-wrenchingly awful is that when the original bailout bill was being negotiated (you know, the one where the Treasury was going to buy toxic waste bonds, the one before the equity positions in banks bailout) some of the more sensible members of Congress wanted to change Section 1322 and let homeowners use the Bankruptcy Courts to reduce the principal value of their mortgages down to the value of the property. Basically, the bank and mortgage lobby told Congress they would pretty much rather not have a bailout than have that.
Oh, well. I guess I’m just not sophisticated enough to understand. After all, I never invested in completley unregulated insurance contracts insuring the lower tranches of multi-layer bonds secured by mortgages based on completely falsified loan files. So, what do I know about finance.