Responsible lending and bankruptcy

I heard a commentator on CNBC mention a “left-wing group” called the Center for Responsible Lending today (they were talking about financial reform legislation pending in Congress), so I decided to check them out.

I wondered if this group had any opinions on bankruptcy, and I found this post from last year on their website:

“Perhaps among all loss mitigation alternatives, bankruptcy may have the least moral hazard. … [B]orrowers who chose bankruptcy to deal with negative equity have to really want to stay in their homes, have to be able to service the secured portion of the mortgage, be willing to live on a budget for five years and have expenses tightly controlled, etc. … Borrowers who are looking for a ‘free ride’ and want to expunge their negative equity should find foreclosure a more palatable alternative.”

Doesn’t sound too radical to me; CRL mentioned that giving bankruptcy judges the power to modify first mortgages (an idea that has been proposed several times but not yet passed) would “save hundreds of thousands of families from foreclosure.” It would also probably lead to more voluntary modifications by banks, which has been a troubled area for several years now.

CRL also believes that there wouldn’t be too much of an impact on future mortgage interest rates from such a plan.

“Left-wing” or not, I’m glad I learned about the Center for Responsible Lending!

 

By Doug Beaton

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