BIDEN: "We should be allowing bankruptcy courts to be able to readjust, not just the interest rate you are paying on your mortgage to be able to stay in your home, but in -- be able to adjust the principal that you owe, the principal that that you owe. That would keep people in their homes; actually help banks by keeping them from going under..."
I thought the top of my husband's head would blow off when he heard that.
I'm opposed to unilateral and sweeping judicial decisions which absolve people of personal responsibility (such as wiping away their debts) or deny them individual liberties (such as requiring a family to keep a terminally ill patient on life-support) -- decisions that go far beyond interpretation of the law. Sen. Biden's proposal is a clear example of an abuse of judicial powers -- one that would do far more harm than good.
But how can that be? you ask. Reducing the interest rate and the principal owed would keep these people in their homes! Why is that a problem?
Let's break it down.
Say you bought your house for $200K in a neighborhood where the median home value was $225K at the time of purchase. You put 10% down - $20K - so your mortgage was $180K.
Then say your neighbor bought his house -- identical to yours -- for $220K a year later when the neighborhood median home value had appreciated to $240K. His home appraised for $20K more than yours -- was determined to be worth $220K -- based on that median value which had risen over the past twelve months, not because of the details of the structure or the size of the lot or any other intrinsic measure. He puts 10% down, too -- $22K -- and his mortgage is $198K.
Another year later, you've been paying your mortgage in full and on time every month, and your principal owed is $175K.
Your neighbor, on the other hand, has fallen behind. After a year of paying late and missing payments, his principal owed is only down to $196K. He's facing foreclosure, and so he goes to bankruptcy court, where the judge adjusts his interest rate and reduces his principal owed to $175K.
That's right -- you've been financially responsible, he's been financially irresponsible, and yet you're both in the same position. His interest rate may even be lower than yours.
Unfair? As Sarah Palin would say, you betcha.
But the problem extends beyond what's fair and what's not. Say you skip a few payments yourself and make your way to bankruptcy court in hopes of getting your principal reduced, too. What if the rest of your neighbors do the same? Or what if, instead of purposely putting themselves in such a position, they sue the state? Now imagine this happening in neighborhoods all over the country.
Plus, on what basis will the bankruptcy courts determine the principal owed? Will judges work with appraisers, or will they rely on their own financial expertise? What if the appraiser assigned to your case determines that your house is now worth more? Should your principal owed be increased? What about judges who refuse to take on such cases for fear of judicial review?
Finally, the biggest potential problem is that prospective buyers will have difficulty obtaining a loan, no matter how good their personal credit may be. If mortgage contracts are fluid -- that is, their value: the principal owed, plus the interest, can be adjusted by a bankruptcy judge -- then they will be an even riskier investment in the future than the sub-prime mortgages of the past.
In short, to use the example above, the bank approved your neighbor for a $198K mortgage plus interest -- but thanks to a bankruptcy court's decision to adjust his interest rate and reduce his principal owed to $175K, the mortgage security loses value.
Multiply your neighbor's case by however many other cases are decided by the court for that bank. That means the investor loses money, so they won't buy more mortgages from that bank. In turn, because the bank is unable to sell their mortgages, they run out of cash and can't approve more mortgages. And we're right back where we started!
Fortunately, it's highly unlikely that Sen. Biden's proposal would ever come to pass; enough knowledgeable people in positions of economic power understand the potential negative repercussions to prevent it from being implemented.
Even so, it's troubling to hear such a suggestion floated as a so-called solution to the glut of current foreclosures and the near-certain future foreclosures as homeowners' rates adjust upwards when their initial rates expire. While Sen. McCain may admit a lack of familiarity with economic issues, Sen. Biden's statement betrays his own lack of knowledge in this area.
Julie is a former Air Force officer and professional project manager turned web writer. She spent four years at the Pentagon and five years in New York City, and her suburban life in Colorado seems pastoral by comparison. She's no political pundit, but she is an objective thinker in a sea of partisan propagandists. She writes for The Mom Slant, Cool Mom Picks, and is co-founder of The Parent Bloggers Network.
"Try as hard as we may for perfection, the net result of our labors is an amazing variety of imperfectness. We are surprised at our own versatility in being able to fail in so many different ways." -- Samuel McChord Crothers
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