Extent of Bankruptcy Reform Hinges on Details - washingtonpost.com

Extent of Bankruptcy Reform Hinges on Details - washingtonpost.com: "How the administration chooses to define several parts of its plan will impact whether tens of thousands of homeowners are excluded, said Henry Sommer, a past president of the National Association of Consumer Bankruptcy Attorneys. 'It could affect a lot of people or very few people, we don't know,' he said.

The details will ultimately be hammered out on Capitol Hill, where lawmakers have been wrangling with the financial services industry for years about allowing bankruptcy judges to lower the principal owed on home loans. Now, bankruptcy judges are precluded from modifying mortgages on primary residences, a practice known as cramdown. The House, where bankruptcy reform has already been approved in committee, could take up the measure as soon as next week, a Democratic aide said."
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This may turn out to be a huge issue. Of course, as usual the Democrats are winging it with the entire economy at stake, so maybe it will be small, maybe it will be big...nobody knows yet.

The way I understand the law as it exists now, bankruptcy discharges the debtors personal obligation under the home loan, so the debtors personal assets are no longer reachable. But the loan is still secured by the mortgage and the mortgagee's lien remains in force. State law may protect the owner's equity, but the bankruptcy judge can't modify the mortgage terms on a principal residence.

That is the very thing Obama wants to change, and that is a very big step to take. But he hasn't said exactly how, or for how many loans or people. The bottom line is that Obama and other Democrats want to allow judges to reduce what the bank gets on their secured loan whenever somebody goes bankrupt. They want to make life easier on the bankrupt creditor.

Given that the overriding fear has been a collapse of the financial industry, I fail to see how this is a good idea. Why would the federal government introduce yet more uncertainty and risk of loss into the home loan business? Why are we bailing them out with one hand and pulling the rug out from under their feet with the other? (Sorry about the mixed metaphor.)

My guess is that Obama and the Democrats will help out the people who got into insane mortgages in the hope of getting rich quick on home flips. They seem to view these people as victims of predatory institutions that made offers they couldn't turn down, instead of seeing them as gamblers who lost very risky bets and deserve the consequences of their own behavior.

Maybe we should have a bailout program for people who went to Vegas and lost money playing double zero on the roulette table.