Judge Keith Lundin, author of an authoritative treatise on Chapter 13 bankruptcy,
has sounded off on the reaction to the mortgage modification bill from
“chicken littles” in the mortgage industry.
Mortgage bankers are in knots over proposed U.S. legislation that allows
loan contracts to be broken up in bankruptcy court, fearing it will taint
the core of their business and raise interest rates.
But their fight against the bill gaining momentum in Congress is an overreaction,
or a red herring to prevent the industry from realizing inevitable losses,
some judges said.
“Judges aren’t just going to run wild,” said Judge Keith
Lundin, of U.S. bankruptcy court in Nashville, Tennessee.
I have often wondered why mortgage bankers have been so virulently opposed
to the mortgage modification bill. My guess is that they are more concerned
about artificially propping up balance sheets filled with toxic assets
so that they can continue to get their bonuses. Judge Lundin addresses
that issue as follows:
Bankers are merely putting off the realities of the ailing housing market,
Judge Lundin said.
“If these guys are worried about value, it’s about what they
did, not because of what I’m going to do,” said Lundin, speaking
of bankers’ roles in offering risky loans. “They don’t
want someone with authority telling them what their securities are worth,
that’s what they’re afraid of.”
Judges in the mid-1980s used Chapter 12 of the bankruptcy code to rewrite
farmland values, aiding farmers who were also faced with falling commodity
prices. After a year or two, the real estate market adjusted, Lundin said.
“I guarantee you, that is exactly what will happen if you allow home
mortgages into Chapter 13″ bankruptcy, he said.