I am very disappointed to read this in the NYT online.
At the same time, Congressional Democrats said they were prepared to drop one of their most contentious demands: new authority for bankruptcy judges to modify the terms of first mortgages. That provision, aimed at preventing foreclosures, was heavily opposed by Senate Republicans.
I hope it is not true. I have yet to read a convincing case for why banks should get all the windfalls for their evident stupidities. I do not like being asked to pay large sums of money for windfalls to the improvident, but given the choice between improvident families losing their homes and stock and bondholders in improvident banks, I know whose windfall I'd choose to hand my a share of my income to.
On a somewhat more cheerful note, it seems that the Dems might “only” hand over $150 billion, which might leave a little money for social programs in the Obama administration. Even though the $700 bn number was clearly made up, I suppose this will be about as small a number as they can get away with. Think what it could have done for health care.
If the Congress doesn't hold some sort of line on the amount, the GOP program of “starving the beast” — making the Treasury so broke that there's no danger Democrats could afford anything popular — would truly have reached its apotheosis.
Wait, wait, wait. This blurb leaves much unsaid. Is this a new rule that would apply to all bankruptcies? Meaning, not only to mortgages originated from non-bailed-out banks? I can see a huge problem if this is the case. Why should anyone get a windfall in such a situation. Example: BIG Bank and Little Mortgagor meet; make a deal; carry on living their lives. Little Mortgagor falls on hard times, is delinquent in payment; and BIG Bank comes to foreclose. If BIG Bank is not one of the bailed-out banks, why should Little Mortgagor be allowed to change the rules of the deal ex post? Feh yourself.
I agree that there are always Devils in the details.
Let me just point out two things. First, I framed the post above in the context of “windfalls”. I’m sure there’s no way to write such a rule that won’t result in some benefits to the undeserving. But I don’t think anyone will put themselves into bankruptcy just in the hopes that they might get a better mortgage. And if I’m going to be taxed for someone else’s windfall, I’d rather it go to my feckless neighbor than to very highly compensated feckless bankers and shareholders.
The second point is that currently the incentive structure for the people who administer many of these mortgages is very perverse: they make much much more money foreclosing than they do restructuring. As a result, they have very little interest in helping the troubled borrower.