January 22, 2009

Proposed Mortgage Modifications in Bankruptcy Code

  • Todd Zywicki

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
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As the nation currently faces a foreclosure crisis of historic proportions with many homeowners in grave financial troubles, the desire to "do something" to address this crisis is understandable. It is thus tempting for lawmakers to amend the Bankruptcy Code to permit modifications of home mortgages since it appears not to require government expenditure. However, the cost of modifying mortgages in bankruptcy, known as "cram down" in bankruptcy lingo, will have enormous costs not only on aspiring future homeowners, but on any American who uses any kind of credit. This written testimony, prepared for submission to the House Subcommittee on Commercial and Administrative Law, elaborates that a "cram down" amendment will lead to an increase in the risk of home mortgage lending, and a dramatic increase in Bankruptcy filings, which will in turn have spillover effects on other consumer credit facilities.