The Wall Street Journal today reported that Citigroup and members of the United States Senate were in the middle of discussing legislation that would allow bankruptcy court judges to modify mortgages. State intervention into private contracting runs totally counter to the autonomy principle behind two parties entering an agreement. One could argue that the 25% of Congress who happen to be attorneys have forgotten this principle.
On the other hand, banks brought this on themselves. These types of workouts could have been done outside of court especially where the homeowner has some income and equity in the home. Allowing borrowers to make payments over a longer period with some agreement that the bank get a larger piece of the homeowners’ equity at the time the property is sold and requiring the consumer to hold the property for some period of time before selling it would be a sound approach.
The political realities of the economy and the additional scrutiny that Congress now places lenders under are coming home to roost. It would have been a lot less expensive regulatory wise had lenders been a bit more innovative by allowing borrowers to modify loans by using available income and whatever equity was left in the home. On one hand lenders cringe about the costs and losses incurred from foreclosure while in the other, they agressively pursue foreclosure.
Alton E. Drew