Fight building over judges redoing mortgages: "WASHINGTON (AP) - Most congressional Democrats say the quickest way to save homeowners like Troy Butler of Saginaw, Mich., is to let them declare bankruptcy and allow judges to dictate new mortgage terms.
Easy, except the lenders that would absorb the pain—and lose control of any deals to ease the terms—do not want to get dragged into bankruptcy court by millions of overextended borrowers."
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The US Constitution's "contract clause" prohibits states from making laws that impair the obligations of contracts. The clause is there because after the Revolution, when the nation was under the Articles of Confederation, states were canceling debts, banning mortgage foreclosure, and so forth. Merchants and banks were going nuts. The temptation is always present for politicians to make themselves popular by declaring a private debt holiday. The problem is that if Congress does things like this, banks will have to factor into every loan the possibility that the terms will be reformed by a judge somewhere down the line. If Congress wants to "unfreeze" credit markets--i.e., get banks lending freely again--this is not the way to do it.
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